Internet billions make taxmen's eyes grow big

By RICHARD BRADDELL

Until the internet came along, the two certainties in life were death and taxes. Now, Governments are struggling to find ways to collect the taxes.

Only this week, the Herald reported that Australian retailers were promoting New Zealand websites as cheap places to buy DVDs and CDs, in large measure because buyers can bypass that country's recently introduced GST.

New Zealand's Inland Revenue Department, which demanded a list of the 80,000 owners of New Zealand websites in an effort to see if they are complying with their tax obligations, is not alone in trying to reclaim the internet as a taxable zone.

The European Community is working on ways to get non-EC companies selling goods into the bloc to collect value-added tax on behalf of member Governments.

But the most interesting developments may be taking place in the United States, where 27 states have set up a project to harmonise sales tax regimes so that tax due in the purchaser's state could be collected on its behalf by the out-of-state vendor.

The reasons are obvious. In comparison with growth forecasts, internet retailing in North America is still minuscule. Researcher Gartner Group forecasts a mere $US30 billion this year, up 75 per cent from $US17 billion last. But this year was a bad year generally for the internet as the correction on the Nasdaq trimmed back dot.com-supporting venture capital.

Even so, e-tailing is expected to grow fast, if not at quite the same rate as global business-to-business e-commerce, which Gartner expects to become an even more fertile ground for tax collection, with growth projected to double every year from the $US145 billion in 1999 to more than $US7 trillion in 2004.

The figures are speculative, but even if the projections are three-quarters wrong, there is plenty of scope for tax dodgers if dot.com sellers fail to collect sales taxes.

E-sellers who fail to collect sales tax, or GST for that matter, on transactions within their home jurisdictions are almost certainly breaking the law. But the position in cross-border transactions, either between states within a country or internationally, is less certain.

In a paper just released, Forrester, another consultancy, reckons American states are already losing $US1.6 billion in sales taxes through internet transactions. Whatever the amount, it can only grow.

Until now, the common perception has been that internet transactions are tax-free, a belief that has been fostered by a 1998 federal law that prevents states from adopting new internet-specific taxes, even although it has no impact on the validity of existing state taxes.

Nevertheless, while some states are asking their taxpayers to declare out-of-state taxable purchases in their annual returns, Forrester believes that strenuous moves now to capture internet transactions would be politically unacceptable. But for how long?

At present, the 27 states working on the harmonisation project have been joined by 12 observers.

If they are serious, they have a huge task ahead, and not just because efforts to expand tax collection could scare away businesses to more cooperative environments and mire states in litigation from angry retailers.

Getting 7500 US tax jurisdictions to work in harmony is no small task, particularly since some states have little or no sales taxes and, therefore, little desire to cooperate.

But Forrester sees the battle as far from lost. It says its own research shows consumers do not mind paying tax online; their greater concern lies in the cost of shipping.

It also believes traditional retailers will support getting dot.coms to pay tax, because it will make them more competitive.

And while large chains such as Barnes & Noble and Wal-Mart have got round sales tax laws by creating their own separate dot.coms, they are now vulnerable to enforcement's recognition that a bricks and mortar presence is an asset which they are using to offer cross-promotions and accept returns.

Not surprisingly, Forrester believes the states that are most reliant on sales taxes will be the leaders in adopting tax streamlining provisions with other states. But they will move slowly at first. Residents who have seen their sales taxes soar as the revenue base has narrowed should be receptive to an education programme that promises lower tax rates. The states will also become more enthusiastic as they see soaring business-to-business e-commerce that is going tax-free.

But it is not until 2005 that Forrester reckons there will be enough critical mass, both in terms of sentiment and the number of states on board, to get legislative action by Congress.

"After more than two-thirds of the states have done the dirty work of streamlining their systems, the issue will have cooled off enough for Congress to step in," Forrester said.

It may be early days, but the simplification of American sales taxes opens new possibilities. An American value added tax is well off the agenda at present. But after five years of tax simplification, it may be another matter.

And pressure is coming from the Europeans, who are much further ahead in tackling e-commerce taxation.

Forrester foresees other benefits. With remote sellers joining traditional retailers in collecting taxes, a wellspring of new retail data will arise, providing immediate information on spending habits and preferences, as well as more immediate retail data for gauging economic health.