Discussion of what must currently be done, how things may change, what effect e-commerce may be having on tax revenue and links to information on taxation. Some information found in E-Commerce textbook on pages EC 6.34 and 6.35.

What you must do now

Scenario: You have an e-commerce site and you are shipping goods to people throughout the United States. If you live in Michigan and your business is in Michigan, you must collect and pay Michigan Sales Taxes if you are shipping to a Michigan address. Income tax must also be paid on income earned regardless of who is receiving your product.

Nexus is the term used to describe the connection between a taxpaying entity (your business) and a government with taxing authority. When you have a physical business presence within a governments area of control, nexus is established. To avoid nexus to other states, the e-commerce text book suggests using a contract carrier such as FedEx or UPS to deliver goods to customers. Because there are other tax liabilities to consider, it is advisable for a company to obtain the services of a professional tax advisor before venturing too far into the e-commerce market.

What the Future may hold (the next five years)

At the end of this page are links to government produced studies on the issue of taxing Internet usage and purchases. The general consensus is that e-commerce businesses that have not established nexus should not have to collect sales taxes from out-of-state customers. One of the major reasons given is that tax regulations vary so much between the States that it would produce an unacceptable burden on businesses who do not have nexus / establishments within those other States. A recommendation made in the report is that a simpler, more uniform tax be worked out before this could even be considered.

Beginning with the 1999 State of Michigan tax return, a new line item check box has been placed on the form. Many States, including Michigan have a Use Tax which requires that a Michigan taxpayer report and pay taxes on a mail-order, Internet or other out-of-state, non-taxed purchase (if used within 90 days of receipt). The check box requires the taxpayer to explicitly indicate that they have not made any out-of-state purchases. If they have made purchases, this provides for a clear admission of perjury for which there are very stiff penalties. Read the article regarding this on line at The Institute of Continuing Legal Education. http://www.icle.org/Connection/0003/ctax.htm

Some of the larger companies which have entered the e-commerce market (Wal-Mart, K-mart) have restructured their operations to avoid nexus between their Online business and their retail operations. While these companies have stores in every state (and therefore the structure in place to pay these taxes) they have created a separate corporate entity that results in their having to pay taxes only in the few states where they have corporate offices and warehouses to support the online portion of their business. (By the way, this is not a new concept. I happen to know that banks have been doing this sort of thing for years to skirt the laws.) As a result, look for the government to take a fresh look at their current opinion.

Is there a Problem?

Is there a loss of tax revenue to states and localities due to business being conducted on the web? Is this a National concern? As one of my Instructors, Walter Davis, was fond of saying . . ."It depends."

When the State of Michigan passed a resolution that reduced the rate at which Property Taxes could increase, they enacted a law that raised the general Sales Tax. The immediate result I experienced from this as a retail salesperson is that consumers stopped purchasing the value enhancing add-ons which we depend on to make a profit. The same effect could occur when/ if a law is passed to tax all Internet purchases. It is my opinion that Government should not interfere with Interstate Internet Commerce and I offer the following thoughts and comments in support:

1. If a business is made to collect and forward taxes, what's the chance that they will move their E-Commerce operation to another country more favorable to Internet businesses? The result would be a loss of American Jobs and the taxes collected from those employees.

2. Few major companies (i.e. Kmart, Best Buy, Toys-R-Us) have shown major profits from expanding to the web but they may have experienced better sales in their stores as a result of people shopping the web site. Increased sales in the store leads to increased Sales Taxes collected.

3. A major boom in Small Companies operating on the Web is occurring driving sales that may not have occurred in any other way (such as eBay Auctions, local computer stores, hobby/ craft makers). This provides revenue to people who go out and make purchases they may not have been able to make (such as furniture, cars, jewelry). Their purchases result in collection of taxes and the driving of other businesses.

4. The positions created as a result of setting up and maintaining E-Commerce sites has resulted in tax paying citizens earning higher incomes and going back to school to maintain these positions while also spending money as consumers.

People in Government, both local and National, need to look at the Gross Dollars collected from all sources. What they may be losing in E-Commerce taxes is more than made up for by the jobs this industry provides to Income Tax paying citizens. An Internet Tax or forced collection/payments of State Taxes would result in a real burden to E-Commerce sites. Further, it is likely that many small businesses would fail, and that the larger firms would relocate. Is the loss of jobs worth the risk?

Lesson Links

E-Commerce Taxation links:
http://www.cob.sjsu.edu/facstaff/nellen_a/e-links.html

The Institute of Continuing Legal Education:
http://www.icle.org/Connection/0003/ctax.htm

Governing.com's The States vs. the Dot.coms:
http://www.governing.com/view/vu041200.htm

The Advisory Commission on Electronic Commerce's Report to Congress:
http://www.ecommercecommission.org/acec_report.pdf

PC Magazine article - Uncertain Future for Web Taxes:
http://www.zdnet.com/pcmag/stories/trends/0,7607,2472850,00.html

The Georgia Public Policy Foundation, Sales Taxes and the E-Commerce Revolution:
http://www.gppf.org/pubs/analyses/2000/Etax%20IA.htm