How Long Will E-Commerce Be a Sacred Cow?

In lawmaking, there are “motherhood issues”--things that no politician dares oppose. This generally should not be confused with “mother’s milk”--the late Jesse Unruh’s famous definition of money in politics.

With the Internet, however, it’s one and the same. The World Wide Web--indeed, anything high-tech--is considered both a motherhood issue and mother’s milk. The milk may not yet be flowing--for all the hype, few Silicon Valley entrepreneurs are big political givers--but politicians see the vast potential and are treating this exploding industry as a sacred cow.

Why else would a consumer product--a book, a computer--carry a sales tax if purchased at the local mall, but be untaxed if bought over the Internet?

The pols--Gov. Gray Davis, most legislators, all the presidential candidates--will argue straight-faced that the Internet is a baby and needs loving, gentle care to fully mature. Taxing Internet sales would be “premature,” Davis says. “Let three or four years go by.”

Based on reports of all the mega-mergers and budding billionaires, however, it’s apparent that this baby soon will be a brute.

American consumers spent $7 billion shopping online over the holidays, according to Jupiter Communications, which researches Internet commerce. Another researcher, Boston Consulting Group, reports that dot-com retailers quadrupled their revenues from the previous holiday season.

“The Internet is competing unfairly against community-based businesses,” asserts Andy Ross, owner of Cody’s Books in Berkeley, an outspoken critic of the government’s laissez-faire policy toward dot-coms. “It’s kind of a scandal.”

*

*

A little background:

Not all Internet purchases are exempt from the sales tax. If a Californian buys a product from an in-state company, the tax must be collected. An out-of-state outfit, however, does not have to collect the tax unless it has a “physical presence” here, the U.S. Supreme Court has ruled. Congress could change that, but hasn’t had the inclination.

There’s another complication: A Californian who buys from an out-of-state firm over the Internet--or through a mail catalog--actually owes a “use” tax equivalent to the sales tax. But this is unenforceable and ignored for ordinary consumers. Most businesses, however, can be audited, and so they pay up.

Also, some items don’t carry any sales or use tax--notably airline tickets.

So how much is the state treasury losing because community retailers are treated differently from dot-coms? Nobody really knows. Estimates range from $18 million to $60 million and up yearly. Most experts agree only that the loss will grow substantially.

“For anybody who’s around kids, that’s obvious,” notes Sen. Wes Chesbro (D-Arcata), chairman of the Senate Revenue and Taxation Committee. “We’re going to be forced to deal with this.”

*

*

Congress and the Legislature have passed three-year moratoriums on Internet taxes. This was aimed primarily at blocking taxes on Web access, which hardly anyone advocates. These freezes expire in late 2001.

A federal commission has been digging into the issue and will make a recommendation in April. The lone Californian on the panel is Dean Andal, a conservative GOP member of the state Board of Equalization. He favors retaining the status quo, contending the potential sales tax loss “is small potatoes.”

By contrast, Rep. Tom Campbell, a moderate Republican who represents Silicon Valley, is one politician who advocates taxing e-commerce the same as walk-in sales. “I’ve not heard Silicon Valley people say this will destroy the Internet,” says the congressman, a U.S. Senate candidate.

In Sacramento, some lawmakers are talking about reducing reliance on the sales tax, which provides 31% of state revenue. Assemblyman Bill Leonard (R-San Bernardino) would phase out most of the tax over 20 years. Sen. Steve Peace (D-El Cajon), chairman of the Senate Budget Committee, would significantly cut it and raise the tax on commercial property.

There’s another fairness issue in all this: Which consumers benefit from Internet tax breaks? They’re primarily the affluent, who can afford a computer.

A recent survey by pollster Mark Baldassare found a definite digital divide: 43% of Californians earning more than $80,000 annually bought holiday gifts over the Internet, but only 7% of those making less than $40,000 did. Similarly, 20% of all adults shopped online, while just 7% of Latinos did.

Clearly, tax equality is not a motherhood issue.