The Voice of the eCommerce Industry

Congressman Hodes Hits a Home Run for Small Business

Congressman Paul Hodes stepped up to the plate for small online retailers, and took a swing at a proposed law that would force new tax collection burdens on even the smallest of businesses who use catalogs or websites to serve their customers.

Hodes' resolution is titled “Supporting the Preservation of Internet Entrepreneurs and Small Businesses,” and its main provision is:

Congress should not impose any new burdensome or unfair tax collecting requirements on small on-line businesses, which would ultimately hurt the economy and consumers in the United States.

It’s good to see that Rep. Hodes was joined by colleagues from both parties, including Reps Capito, Lungren, Pitts and Schrader. 

The Hodes resolution is a direct response to legislation from Rep. Bill Delahunt that would force small retailers—those doing just $100K in annual remote sales -- to act as tax collectors for thousands of state and local tax jurisdictions where they have no physical presence.

Curiously, the legislation is titled the “Main Street Fairness Act” and is being sold as good for small business.   But main street small retailers have been getting clobbered by Walmart and big-box stores – not by the Internet.  In fact, main street is learning that the internet is their best hope for finding low-cost supply and finding new customers around the world.

So what would the Delahunt legislation really mean for small retailers who are staking a claim in the online world?

The bill Rep. Delahunt just introduced sets no level for the small seller exception. Instead, it leaves that to the tax collectors running the Governing Board of the Streamlined Sales Tax Project (SSPTP).   On April 30 of this year, this Governing Board voted to cut the small seller exception from remote sales level of $5 Million to just …  $100,000.

But wait, that $100K is just for starters.   The Governing Board amendment included this prescription for driving the small seller exception even lower:

The exemption threshold shall be set at a relatively low level and over time adjusted downward so that only sellers making isolated or occasional sales are excluded from the collection requirement.

Run the numbers:  $100,000 in gross sales is about $8,000 per month.  After expenses for cost of goods, marketing, accounting, communications, travel, etc. there’s not much left to pay for the owner's time, let alone costs of collecting taxes for 46 states.

And what kinds of costs will SSTP bring? Advocates of SSTP say that Certified Service Providers (CSPs) have software that makes it trivial for even the tiniest businesses to collect sales tax for everyone. But again, a little investigation shows just how big these costs would be be.

A Cost of Collection study sponsored by the SSTP Governing Board shows that small sellers (under $1M) spend almost 17 cents for every dollar they collect for states. And even if CSP software works as promised, that only helps with 2 cents of the 17 cents in costs per dollar collected.  That leaves small sellers with a 15% cost burden on every dollar they collect, for things like:

• Paying computer consultant to integrate CSP software into the seller’s home-grown or customized software
• Training for customer support and back-office personnel
  Answering questions from customers who claim they should be tax-exempt
• Answering calls and emails from customers questioning the taxability of items, or sales tax holidays in remote jurisdictions.
• Handling audit questions from 46 states, since the CSP will inevitably pass those questions along to the small seller for resolution
• Paying accountants and computer consultants to help find the answers to all these questions.

These collection burdens will be a huge problem for catalog and online sellers who are collecting only their home-state sales tax today.    Ask any small business, on Main Street or online, and you’ll learn it’s hard enough to collect sales tax for one state, let alone all 46 states with sales tax laws of their own.

With a full picture of what small online retailers would face from Rep. Delahunt’s proposal, we can see why Rep. Hodes and his colleagues were ready to go to bat for internet entrepreneurs and small online sellers.

A close look at the facts show that the SSTP would impose big collection burdens on small businesses, while adding less than three-tenths of one percent of state and local tax revenues. 

Sounds like Delahunt's pitch for SSTP ought to be returned deep into the center field seats.   Swing away, Rep. Hodes!

--Steve DelBianco

When it comes to Internet taxes, where you sit determines where you stand

There's a wise adage that goes "Where you sit determines where you stand."   Keep that in mind when you hear someone advocate a new sales tax collection mandate on small out-of-state retailers.

In a post at BNET last week, Chris Dannen described how big retailers are supporting the so-called “streamlined sales tax”:

“Brick-and-mortar retailers — many of whom have operations online — are some of the most vocal proponents of the new online tax laws. The members of the pro-tax lobby, which includes Best Buy, WalMart ,Target and others, already collect sales tax online, regardless of the buyer’s state, and see Web-only retailers as having an unfair advantage.

from How to Tax E-Commerce without Killing Entrepreneurship (and eBay)”

Big-box stores like Walmart and Target support a federal mandate that forces everyone to collect sales tax, even for states where they have zero presence.  So why would these giant chains  -- who already have to collect taxes on their web sales -- stand for this? 

Because from where Walmart sits, any simplification – even a little – helps reduce their costs.  And because these big boys want to impose new tax collection costs on their small online competitors.

In his comment on the BNET post, David Campbell tells us where his company stands on these new tax collection burdens:

Our company, FedTax.net, is launching a completely FREE service named TaxCloud, which automatically calculates accurate local sales tax for every jurisdiction in the United States. Internet merchants can point their existing e-commerce systems at TaxCloud for sales tax calculation, the same way they point at USPS/FedEx/UPS for calculation of shipping rates. For those states which have come into compliance with the Streamlined Sales Tax Agreement, TaxCloud will also automatically remit collected sales taxes, file periodic sales tax returns, and FedTax.net will act as the primary responder in the event of a jurisdictional audit. - again all for FREE.

Now, think about where FedTax sits and you'll understand why they are also standing for this new tax law.  FedTax stands to gain millions in new revenue Congress forces small businesses to seek help  -- from services like FedTax. 

But don't think for a minute that a small retailer is going to find relief from the lookup and remit functions that FedTax would provide.   The real cost for small sellers starts when they have to integrate FedTax tools into their home-grown and customized online shopping carts. And after they swallow that cost, small sellers will spend loads of time and accounting fees handling exceptions, exchanges, and state tax audits.

Meanwhile, FedTax collects their fees from state tax collectors, just for giving a band-aid to small sellers suffering from mortal wounds to their cost structure.

WalMart and Target are happy, too, while they watch small online competitors follow main street retailers into the dustbin of American business history.

If you think about this from where small businesses sit, there's just no way Congress should stand for a new tax scheme like this.

--
Steve DelBianco

On Tax Day, a Taxing Year (Already) on Internet Commerce

It’s April 15, so hopefully nobody’s waiting in long lines at the post office (though we think you should be using the Internet to file electronically). Unfortunately, it’s only April but already it has been a taxing year for online commerce.

We’ve seen six tax-related categories of bills that have been introduced in state legislatures this year: (1) Privacy-invading purchase reporting laws; (2) Bounty hunter bills; (3) affiliate advertising as a nexus for requiring sales tax collection; (4) imposing hotel taxes on online travel companies; (5) expanding Internet sales taxes based on inadequate simplification; and (6) new taxes on digital downloads.  

Colorado law turns online companies into the purchasing police (and snitch)

Colorado passed HB 1193 earlier this year (it takes effect in May), and in an effort to get consumers to pay the use tax on Internet purchases it requires out-of-state companies to share purchasing data with the state Dept of Revenue.

Out-of-state retailers must track and report the purchases of Coloradans and: (a) file an annual statement with purchase data for each purchaser to the Department of Revenue; (b) send buyers a summary statement of all their purchases so they know how much use tax to pay (like a 1099 form we receive on investments, only would it be called “Form 1984”?); and (c) on every invoice and receipt, notify Colorado purchasers of their need to file a sales and use tax return with the state; Colorado’s Department of Revenue will now know all the vendors where residents made online or catalog purchases from remote sellers. This would include sensitive items of a particular kind of merchandise -- sex items, specialty books, items that reveal political views, etc.

Declan McCullagh wrote a good article on this yesterday. California has an almost identical bill pending (AB 2078). So does Tennessee (HB 1947).

Deputizing plaintiff’s lawyers to sue for uncollected taxes

Georgia (SB 512) was a “bounty hunter” bill that would give the state revenue commissioner broad authority to to hire contractors on contingency to go after uncollected sales taxes. It would authorize payment of contingency fees to lawyers who successfully sue remote online retailers to enforce collection obligations. The bill failed to meet the legislature’s crossover deadline, so it’s effectively dead this year.

Affiliate nexus laws are an unconstitutional expansion of sales tax burdens to out-of-state businesses.

Colorado (SB 1193), Connecticut (HB 5481), Illinois (SB 3353), Maryland (SB 824), New Mexico (HB 50), Virginia (SB 660) and Vermont (HB 661) introduced bills declaring that some forms of Internet advertising are equivalent to having sales agents in their states. California’s Senate Budget and Fiscal Committee passed a budget report that includes an advertising nexus tax. All these states want to force out-of-state advertisers to collect and remit sales tax on sales to their residents.

Advocates believe the measures will raise tax revenue, but that’s a false hope, as seen in states that enacted this law in 2009. Moreover, fewer advertising dollars would flow to in-state websites, costing income and jobs. State laws that use Internet advertising as a proxy for an in-state sales representative will stunt the growth of new business models and distort the evolution of Internet marketing.

Imposing hotel taxes on services provided by Online Travel Companies—the wrong tax for the wrong jurisdiction

Local governments want to levy their double-digit hotel occupancy taxes on service fees charged by online travel websites. New York City passed an ordinance, the state of Florida considered legislation and sued Expedia and Orbitz, and 67 other municipalities have filed lawsuits.

In Jan-2009, the Multistate Tax Commission recommended a model bill to impose hotel taxes on service fees charged by travel agents. But treating online intermediaries as hotels is the wrong approach — service fees should not be taxed the same way as a hotel room charge.

NetChoice is now working with the Streamlined Sales Tax Governing Board and with NCSL to evaluate an alternative proposal that taxes agent services as a service rendered to the traveler booking the room.

Expanding Internet sales taxes, based on inflated expectations and inadequate simplification

Overblown tax revenue estimates are luring states into a system where costs could outweigh benefits. Florida and Virginia are the latest states betting on inflated tax collection estimates if they embrace a nationwide sales tax regime called the Streamlined Sales Tax (SST).

For a decade, the SST sought to reduce the burden of sales tax collection on interstate commerce, as held by the Supreme Court’s Quill decision. However, the SST is not nearly simple enough.  Moreover, recent research proves that the lost revenue from taxes on out-of-state purchases is grossly overstated.

New taxes on digital downloads of music, movies, books, games, and software 

Colorado (HB 1192), Indiana (SB 250), Wyoming (HB 29) and Vermont introduced legislation—and Oklahoma introduced a budget proposal—that would impose new sales taxes on digital downloads.

States are looking everywhere for new revenue, but it doesn’t make sense to add taxes to digital downloads, the greenest way you can get music, movies, books, games, and software. Instead, states should be encouraging behavior that avoids round trips in the car, warehousing, and the use of plastic and packaging.

Moreover, some state tax administrators wrongly contend that digital goods are the equivalents of offline products.  Just ask the Kindle users whose books were ‘recalled’ by Amazon. Finally, these bills place in-state businesses at a disadvantage to out-of-state competitors, who wouldn’t have to collect the sales tax when selling the same downloads to in-state customers.

-Braden Cox

Rocky Mountain Low: Colorado’s New “Track & Tax” Law Invades Consumer Privacy

 

He climbed cathedral mountains, he saw silver clouds below
He saw everything as far as you can see
And they say that he got crazy once and he tried to touch the sun
And he lost a friend but kept his memory

-John Denver, Rocky Mountain High

We know that states are increasingly looking to tax anything and everything, including on the Internet. As Declan McCullagh reported earlier this week, Colorado and “fifteen other states have considered or are considering enacting laws targeting Amazon and other e-commerce companies that typically do not charge sales tax for shipments sent outside their home state.” These nexus taxes are #2 on the NetChoice iAWFUL list of bad legislation.

But Colorado’s recent “track and tax” law marks the most privacy-egregious Internet-related tax law we’ve seen. 

Here’s the rub:  The Colorado state tax department will now have a listing of all purchases its citizens make from out-of-state companies. Why? So it can enforce its tax on purchases by way of the use tax that each of us owes to our government when sales tax isn’t collected.

HB 1193 was enacted last month as part of a package of revenue raising legislation. It originally started as an advertising nexus bill, but turned into a reporting bill when a lot of in-state companies that rely on affiliate advertising revenue complained that they would be harmed. Now it is consumer privacy that is harmed.

HB 1193 forces out-of-state retailers to track and report the purchases of Coloradans: (a) must file an annual statement with purchase data for each purchaser to the Department of Revenue; (b) must send buyers a summary statement of all their purchases so they know how much use tax to pay (like a 1099 form we receive on investments); and (c) on every invoice and receipt must notify Colorado purchasers of their need to file a sales and use tax return with the state;

The state revenue department just issued emergency regulations to resolve some but not all of the questions from retailers. Unfortunately, the department assumes that the legislature wanted notices shown on every single invoice — effective as of last week.  And the state hasn’t yet told online retailers how they would send snail mail reports to purchasers for whom they have no mailing address.

So that it can earn a few more bucks in sales tax, Colorado’s Department of Revenue will now know all the vendors where residents made online or catalog purchases from remote sellers. This would include sensitive items of a particular kind of merchandise -- sex items, specialty books, items that reveal political views, etc.

When Colorado residents learn that this law makes them pay more taxes, they’re not going to be happy.  And they’ll be positively perturbed when they learn that the state is collecting information about their personal purchases. I would hope that other states will wait to see the blow-back from Colorado voters before copying Colorado’s law.

I see a new version of John Denver’s song:

He climbed the capitol dome, he saw silver dollars below
He saw every out-of-state purchase as far as you can see
And they say that he got crazy once and invaded consumer privacy
And he lost voter confidence but kept his memory—don’t do this again.

-Braden Cox

Advertising Nexus Tax Harms In-State Organizations the Most

There’s a lot of misinformation surrounding the so-called “Amazon tax.” Advocates call for an advertising nexus tax because they think a sales tax collection obligation for out-of-state online companies is an equalizer for brick-and-mortar “main street” retailers. Even if that were true, advertising as a nexus for sales tax obligations is not the way to achieve increased revenues (we think it harms the local economy). A recent example of the confusion surrounding this complex issue is today’s editorial supporting new tax legislation in the Lynchburg News & Advance.

The editorial supports SB 660, a legislative proposal to create the “Amazon tax” in Virginia. However, the editorial gets it wrong on a number of accounts, and fails to consider how this legislation would hurt Virginia’s economy.

Despite what the editorial says, Virginia does not “exempt” out-of-state online or catalogue retailers from collecting sales taxes. Any seller who has a physical presence in Virginia is already obliged to comply with our sales tax law.  Sellers who don't have a physical presence are not required to collect, because the US Supreme Court has held that thousands of tax jurisdictions with differing rates and rules are an unconstitutional burden on interstate commerce.

The proposed law declares that out-of-state retailers who pay Virginia
websites to host advertising are akin to having an on-the-ground sales force
in Virginia. This would not force cyber-retailers to begin collecting sales tax here. If the bill passes, out-of-state retailers will just stop paying Virginians for advertising referrals, as they did in North Carolina and Rhode Island when those states passed similar legislation.

While this law would have little impact on out-of-state retailers, it would
harm everyone in the Commonwealth who relies on those advertising dollars.
Virginia nonprofit organizations and even public school PTAs like Boonsboro Elementary in Lynchburg use Internet advertising for revenue and fundraising
efforts.  And there are more than 5000 Virginia businesses who rely on this
advertising revenue to support their businesses and hire employees. Those
businesses have already received notice from that major advertising
relationships will be severed if this bill becomes law.

That’s why the net effect of this legislation is all pain and no gain. As
indicated in the bill's fiscal impact statement, there is no actual
expectation of new sales tax revenue.  Last year, North Carolina passed a
similar law but reports no new revenue, and an online marketer in Greensboro
announced plans to leave the state, taking 500 jobs with them.

Virginia is now ranked as America's top state for business. But SB660 would
be bad for businesses that rely on advertising revenue, costing the
Commonwealth income and jobs.

The Worst Internet Laws in America, Take Two

Back in June, we introduced iAWFUL (the Internet Advocates' Watchlist for Ugly Laws) as part of a broader effort to push back against America's worst Internet legislation. Two months have passed, and while many of the bills in the top 10 have changed, they remain every bit as AWFUL.

Earlier today NetChoice unveiled the first major update of iAWFUL, which lists the 10 worst Internet bills/laws in America. The updated list includes five new items, with new laws in the top 2 slots.

But before I get to the truly AWFUL measures in the new list, it's worth mentioning a few that fell off the list, in large part thanks to the pressure that Internet advocates exerted through iAWFUL:

#2 on the June iAWFUL list was a California bill that would have forced unworkable technical restrictions on the posting of photos to social networking pages. The bill's sponsor responded by working with Internet advocates to fix problems with the measure.

#3 on the June iAWFUL list was a bill in Connecticut that would have required sales tax collection by out-of-state businesses that pay commissions to in-state affiliates. The Governor heard our concerns about the impact on in-state publishers and school charities, and has thus far kept this measure off the table in budget negotiations.

#5 on the June iAWFUL list was a Connecticut bill to let police conduct searches of homes where goods were being stored by online dealers – without having to obtain a search warrant. Thanks to iAWFUL publicity, this bill stalled in the House.

This is what iAWFUL is all about: creating positive change through informed advocacy.

Now for the bad news. For every measure that fell off the iAWFUL list, we found a truly AWFUL replacement.

Toping the list is a Maine law that will limit teens’ access to online services and expose valuable websites to a rash of lawsuits. At the end of its last session, the Maine legislature voted to require Web sites to obtain “verifiable parental consent” before asking Maine teenagers to enter just their name and age.

As is so often the case with bad Internet legislation, it seems to have been drafted without any consideration to the unintended consequences it would impose on important, socially valuable websites that provide content, communications and commerce for millions of consumers.

Web sites have no workable way to obtain "verifiable parental consent," so the real impact of the legislation is that teenagers in Maine will be denied access to valuable online tools and services ranging from college finders to the companies that sell class rings. And given the borderless nature of the Internet, its impact could be felt far outside of Maine. On a list of bad laws, this Maine measure takes the top spot.

Another new law follows closely at #2 in the new iAWFUL list. New York City is set to impose its 20% tax rate on hotel reservation service fees charged by travel agents and online travel websites. The city already rakes in 20% on the hotel room charges, but now they want 20% of any fees collected by travel agents, too. As I wrote last month, this is awful for hotels, travelers, and agents who’d have to start filing returns in every city that followed the New York’s iAWFUL example.

Beating back bad Internet laws is like playing whack-a-mole. There always seems to be a new one rearing its AWFUL head.

--Steve DelBianco

The full iAWFUL list for August-2009 is posted here and below:

1. Maine Predatory Marketing Law – What’s wrong? Creates an unprecedented prohibition on collecting information about and marketing to teenagers. At the very end of its session, the Maine legislature passed a sweeping law that regulates a company’s marketing and data collection practices.  Ostensibly modeled from the federal Children’s Online Privacy Protection Act, the Maine law (10 MRSA c.1055) requires “verifiable parental consent” before any company collects or receives personal information of anyone under 18 years old . This law will impact all sorts of websites where teenagers can provide their names and other personal information. It also flat-out prohibits using that information for marketing products to minors. The law imposes strict liability that would prevent common marketing practices used to serve teens information on colleges, test prep services, class rings, etc. Moreover, the law enables private rights of action and sets minimum statutory damages that will encourage frivolous lawsuits where there is no actual harm whatsoever. The law becomes effective on September 12, 2009, but we’re advocating for a stay to examine constitutional questions and unintended consequences. See http://www.mainelegislature.org/legis/bills/bills_124th/chapters/PUBLIC230.asp

2. Hotel Taxes on Online Travel Companies. What’s wrong? Travel sites are being threatened with the wrong tax rate in the wrong jurisdiction.  Local governments want to levy their hotel occupancy taxes on service fees charged by online travel websites.  New York City recently passed an ordinance to impose its 20% tax on these fees, a move that’s opposed by over 100 NYC hotels and by the American Society of Travel Agents. The state of Florida also considered bills to tax service fees as hotel rentals. This is the wrong approach. Service fees should not be taxed the same as a hotel room charge.  If these service fees were to be taxed at all, they would be taxed as a service rendered to the traveler booking the room -- a new tax that would have to be levied by the jurisdiction where the traveler resides. See http://blog.netchoice.org/2009/07/discount-hotel-rooms-a-great-deal-for-you-but-a-disappointment-for-tax-collectors.html

3. New Jersey Social Networking Bill (A 3757) – What’s wrong? It turns social networking sites into social networking police. This bill requires social networking websites to promptly review user allegations of harassment and abusive language, and to provide a report of the result of any review "upon request" from the user. Many sites already have “report abuse” buttons and they already revoke abusive users. However, faced with adverse publicity and cost of lawsuits, many websites will be forced to lower the bar for kicking-off users. This isn’t confined to websites based in New Jersey—it will regulate any website, anywhere, that can be used by New Jersey residents. For more information, see http://blog.netchoice.org/2009/04/new-jersey-bill-requires-myspace-to-be-mypolice.html

4. Revenue Rulings by Colorado and Washington State Tax Administrators Create New Digital Download Taxes – What’s wrong? Discriminates against goods and services sold online versus offline. The Colorado Department of Revenue recently issued a ruling that would impose sales tax on any service or subscription where users can download or print documents or web pages. Services aren’t taxed in Colorado, but this ruling makes them taxable if the service is provided online. Just emailing a document to a customer would make an otherwise nontaxable service into a taxable digital good.

In addition, the Washington Department of Revenue issued a draft rule that taxes all digital products, regardless of how they are accessed (downloaded, streamed, subscription service, networking, etc.). Washington broadly defines “digital good” to encompass a variety of things, even digital schematics of a lawnmower transferred electronically to a repair shop! What’s more troubling is that the ruling suggests that payments for displaying online advertising would suddenly become a taxable event.

5. North Carolina Digital Downloads Tax Bill (HB 558/S 487) – What’s Wrong? Discourages the Greenest Way to Purchase Music and Other Content. This bill would discourage the most environmentally friendly way for consumers to purchase movies, music, and software by applying a sales tax to the digital download of these goods. The bills would also place local businesses that sell these goods at a disadvantage to out-of-state competitors. For more information, see http://blog.netchoice.org/2009/06/yes-north-carolina-lets-be-fair-about-digital-downloads.html

6. North Carolina Tickets Tax Bill (SB 99) – What’s wrong? Taxes the Internet (and only the Internet) resale of tickets. SB 99 violates federal law because it explicitly targets Internet—and only Internet—ticket sales. The Internet Tax Freedom Act Amendment Acts of 2007 (Public Law No: 110-108) provides a moratorium through November 1, 2014 on any “multiple or discriminatory taxes on electronic commerce.” This law bars federal, state and local governments from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and email taxes. It also prohibits the sort of prima facie discrimination exhibited by SB 99—“Reselling or offering to resell admission tickets on the Internet…”). For more information, see http://blog.netchoice.org/2009/05/north-carolina-bill-could-be-first-law-to-be-a-multiple-or-discriminatory-tax-on-the-internet.html

7. Federal & State Bills on Organized Retail Crime – What’s wrong? They create unwarranted, extraordinary burdens on online marketplaces. Federal: The Combating Organized Retail Crime Act of 2009 (S 470), the Organized Retail Crime Act of 2009 (HR 1173) and the E-Fencing Enforcement Act of 2009 (HR 1166). State: Massachusetts HB 1344. These bills would mandate online and off-line marketplaces to investigate suspicious sales, place disclosure requirements on online marketplaces, impose obligations upon online marketplaces to police small retailers absent evidence of criminal activity. The Massachusetts bill provides for the forfeiture of any property used or intended to be used to commit or facilitate a violation, and is so broad that it could encompass a company's servers and domain names. For more information, see http://blog.netchoice.org/2009/02/everything-old-is-new-again-big-retailers-going-after-ecommerce-again.html

8. Massachusetts Online Advertising Bill (HB 313) – What’s wrong? It threatens the viability of new business models on the Web. Massachusetts seeks to regulate “online preference marketing” in which information is stored from consumers’ online searches and used by advertisers to target specific advertisements toward them. But there is nothing nefarious or dangerous to consumers about advertising that is more relevant to them. The bill is unnecessary because industry is already working toward self-regulatory best practices. Consumers—not legislators—should decide whether or not this type of service succeeds in the marketplace.

9. North Carolina Advertising Nexus Proposal. What’s wrong? Unconstitutionally expands sales tax burdens to out-of-state businesses. North Carolina is the latest state (after New York and Rhode Island) to rule that Internet advertising triggers a nexus for sales tax collection and remitting obligations for out-of-state businesses. States think that they are expanding their revenue base, but they are wrong—fewer advertising dollars would flow to in-state publishers and websites. Online companies and content providers are still experimenting with new models for advertising and distribution. State laws that use Internet advertising as a proxy for an in-state sales representative will stunt the growth of new business models and distort the evolution of Internet marketing.

10. New York Online Employment Services Taxation Issue – What’s wrong? Discriminates against services provided over the Internet. The New York Tax Department asserts that online job-seeking and resume services may be subject to sales taxation. New York currently taxes “information services” and maintains that the providing of employment information falls within this definition. We disagree. Online companies fulfill the traditional role of a "headhunter" (which is a non-taxable service) only using non-traditional means. The fact that information is provided or utilized digitally does not change the fact that their service is designed to establish an employment relationship between an employer and a job seeker. 

Book your hotel online? If you paid less, tax collectors want more.

Online travel companies (like Expedia, Orbitz, and Travelocity) are intermediaries between hotels and consumers. They offer big discounts on hotel rooms, and they charge service fees for making the booking.  Millions of consumers are now using these services, especially for leisure travel. 

Now, local governments where these hotels are located want to impose new taxes on these service fees.  We’re not talking just about the local sales tax here; these guys are demanding the hotel & occupancy tax PLUS the regular sales tax, which amounts to 15-22% in taxes on your hotel bills.

Thing is, these online travel companies aren't running hotels – they’re offering a service like any other travel agent.   If a state or local government wants to tax service fees, they have to enact a sales tax on services.  No way should online travel companies or travel agents have to deal with the multiple rates, rules, and filing systems across several thousand hotel tax jurisdictions.

That’s the message we delivered this week in Philadelphia, at the annual meeting of the National Conference of State Legislators (NCSL).

Online travel companies (OTCs) operate what is known as the "merchant hotel model." This model has been around for decades in the offline world. Travel sites don't buy or sell rooms--instead they negotiate for deep discounts on room rates, usually much lower than the walk-in rate. These travel sites work to attract travelers to their web sites, and offer the discount rooms, often bundled into a travel package that includes airfare and auto rentals. 

This model is a win-win for both the hotels and consumers. Hotels have a new distribution channel to help fill rooms that would otherwise go empty. Consumers get the advantage of much cheaper room rates. It's what we've come to expect from the Internet--new business models and distribution efficiencies that create added value for both buyers and sellers. Isn’t everyone happy about that?

Well, the tax collectors aren’t so happy. One group that represents government tax collectors--the Fair Hotel Tax Collection Coalition--wants consumers to pay more taxes when they book rooms through sites like Expedia and Orbitz. At the NCSL meeting, Martin Morris of the coalition said that state and local governments are losing $8 billion in taxes that should be collected by online travel companies. He endorsed the Multistate Tax Commission (MTC) proposal to tax these service fees at the 15-20% rates levied on your hotel bill.  In his testimony, Morris refused to acknowledge the difference between the actual cost of the hotel room and the service fee charged by travel agents and online travel sites.

Hotel operators--such as Marriott, Hilton, and Holiday Inn--already collect state and local occupancy taxes on every room they rent. And online travel companies already collect these taxes as part of their charge to consumers, and pass it along to the hotels. Travelocity describes it this way on its web site:

What is a "tax recovery charge?" Well, it is our travel suppliers, and not us, that have the obligation to collect any applicable taxes, governmental fees and other charges and remit them to the government. Therefore, what we're collecting from you is a "tax recovery charge" that is equal to the amount we expect our travel suppliers to bill us so they can pay those taxes, governmental fees and other charges to the government.

Seems simple enough, but some state and local tax authorities say that occupancy taxes should apply to the total price that online travel sites charge (including service fees), not the negotiated rate that hotels actually get for the room.  But cities and states can't tax service fees like they tax hotel rooms, and they shouldn’t impose new collection burdens on travel websites. 

First, online intermediaries shouldn't be confused with the parties they intermediate. Expedia and Orbitz are not hotel operators, and therefore shouldn't be forced to collect and file occupancy taxes that apply to hotels. Allowing this doublespeak sets a bad precedent for other websites that act as intermediaries or platforms for connecting buyers and sellers.  

States should recognize that anything above what the hotel actually receives is a fee for service.  If a state want to tax service fees, they know exactly how to do it: by expanding their sales tax base to include service fees.   States also know who should get the tax revenue: the jurisdiction where the purchaser received the service, most likely at their home or office where they went online to make the reservation.   (see this detailed analysis from the nation’s top tax professor, Walter Hellerstein).   

This method follows the Streamlined Sales Tax Project, which is the basis for "fair" taxation of e-commerce.  Yet for some reason it's not acceptable to the "Fair" Hotel Tax Collection Coalition.  Go figure.

Over 100 million people visit online travel sites every month!  States and cities that are struggling through a recession should be looking to grow their travel and tourism business, not taxing them with extreme prejudice.

 

Gov Schwarzenegger Terminates Nexus Tax, Overstock Going Back to Cali

Yesterday was a big day for any business, nonprofit organization, or fundraiser that relies on affiliate advertising that depend upon Internet advertising for important revenue and fundraising efforts: Governor Schwarzenegger vetoed the nexus tax and calls up Overstock.com to invite to reinstate their affiliates in California.

As we've written previously, all sorts of organizations depend on Internet advertising. Online companies are experimenting with new ways to deliver products, services, and content, and business of all kinds are going online to reach consumers and advertise to receptive audiences. The Gov's veto sends a strong message that this growing business model is welcome in California.

It is important to note that the proposed budget legislation was indeed a tax increase. Contrary to the statements of nexus tax proponents, in no event would new money flow into California. Any incremental sales tax collected from online sellers just moves from the California purchaser to the state treasury, at a time when households are being squeezed by a struggling economy. The result: fewer advertising dollars would flow to California publishers and websites who employ and serve California’s residents today.

And this is one tax increase that would have serious unintended consequences. An affiliate advertising tax would harm California businesses, nonprofit organizations, and even public schools that depend upon Internet advertising for important revenue and fundraising efforts.

Slam Dunk WSJ Editorial on Internet Taxes

Check out today's Wall Street Journal editorial on the affiliate nexus tax that North Carolina is considering -- aptly titled Tarheels vs. the Internet. This comes on the heels (pun intended) of news that Amazon will terminate its affiliates in North Carolina.  It also talks about the tickets tax, which is blatantly in violation of the Internet Tax Freedom Act because it only applies to the Internet resale of tickets.

-Braden Cox

Amazon Threatens to Leave the Affiliate Tax Jungle in North Carolina

Welcome to the jungle
We take it day by day
If you want it you're gonna bleed
But it's the price you pay

Amazon.com announced yesterday that it won't be paying the price of affiliate advertising in North Carolina if the state uses it to assert nexus for sales tax collection. It will stop using affiliates in the Tar Heel state, which is what Overstock did in New York when the state was considering the affiliate nexus approach.

States are wrong-headed when it comes to asserting tax nexus just because some companies use a web-based network of affiliates to help advertise their products. As I've discussed before, affiliates are more akin to in-state advertisers, not sales reps.  

Furthermore, states that pass these affiliate nexus bills really end up hurting in-state companies that rely on Internet advertising.  At a time when companies are struggling for ways to make money on the Internet, we think now is a particularly bad time to tax Internet marketing.  

North Carolina's affiliate nexus tax proposal is #4 on the NetChoice iAwful list of bad legislation. We think it should stay out of the affiliate tax jungle. It's constitutionally messy, bad policy...and as Guns 'N Roses mildly stated, it' gonna bring you down- huh!

-Braden Cox

Louisiana Bill Taxes Internet Access Despite Federal Moratorium

There's a hearing going on as I write on a Louisiana bill (HB 569) that would create a new tax on the Internet bills of consumers, despite the fact that there's a federal moratorium prohibiting it.

We just heard Attorney General James D. "Buddy" Caldwell say that this isn't a "tax", it's a "fee."  Louisiana is taking an interesting approach – HB 569 would impose a tax of 15 cents per month on ISP subscribers that would go to preventing and prosecuting Internet-based crimes against children.  AG Caldwell claims that it is merely a “usage fee” -- the price we pay for using the Internet.

But the Internet Tax Freedom Act explicitly sought to prevent the imposition of a tax that simply used different terminology. The Act defines a tax as:

(i) any charge imposed by any governmental entity for the purpose of generating revenues for governmental purposes, and is not a fee imposed for a specific privilege, service, or benefit conferred; or
(ii) the imposition on a seller of an obligation to collect and to remit to a governmental entity any sales or use tax imposed on a buyer by a governmental entity.

Under this definition, a charge on Internet access is not like a fee imposed for recording a mortgage, for example. When you pay a recording fee, you pay for the costs you impose on the government for handling your transaction. If you were to pay a "usage fee" for law enforcement to deal with online safety, you're paying for general services, something that law enforcement/government should be doing anyway to protect the public.

States are cash-strapped right now. Louisiana is pursuing a worthy goal of trying to provide more resources for law enforcement for Internet safety. Taxing the Internet is just the wrong way to do it.

If Louisiana’s  law enforcement/criminal justice system needs more resources to pursue and control criminals, the state shouldn’t hesitate to re-allocate its revenue or even raise the taxes that already fund those efforts.  It’s absurd to tax ONLY Internet users when child predators do nearly all their evil in the physical world of school playgrounds and hotel rooms. Under the logic of the bill's proponents, we should also be adding to the hotel tax, or to the cell phone tax since conversations occur on cell phones.

UPDATE:  The bill was deferred by committee vote. This usually means that the bill is dead for the session.  

-Braden Cox

Nothing Nice on This List -- Introducing iAWFUL, a NetChoice Initiative

Some of the biggest threats to the Internet have always come from well-meaning lawmakers looking to "fix" it. And lately, there’s been a whole lot of fixin’ efforts going on.

At NetChoice, we've always been committed to challenging legislation that threatens our vibrant industry. Today more than ever, we need a more unified and systemic approach to combat bad legislation.

That's why we've created iAWFUL, the Internet Advocates Watchlist for Ugly Laws. 

iAWFUL identifies America's 10 worst legislative and regulatory proposals targeted at the Internet. Through iAWFUL, NetChoice will urge citizens to join the fight to defeat bills and proposals that threaten the future of ecommerce and online communication. The list will be continually updated to reflect the most immediate dangers, based on regulatory severity and likelihood of passage.

While misguided Internet legislation is nothing new, the threat that such legislation poses has increased dramatically. The latest breed of legislative proposals are among the most restrictive we've ever seen; they can crop up anywhere, as state lawmakers increasingly take the lead; and they threaten an Internet that increasingly lies at the heart of global commerce and communications.

State-based legislative efforts account for the majority of entries on iAWFUL, a stark indication of the growing push in statehouses to regulate and tax nearly every aspect of online behavior.

Topping the inaugural iAWFUL list is New Jersey's Social Networking Bill (A 3757), which would require the operators of social networking sites to aggressively police their users. In addition to stifling the free exchange of information and communication on social networking sites, the proposed bill would impose a massive burden -- particularly on smaller, upcoming services that lack the resources to take on such an unnecessary and invasive task.

We encourage anybody who cares about the Internet, really to head on over to the iAWFUL site, check the full list, suggest laws that should be included, and join the fight to uphold innovation and Internet freedom. 

Yes, North Carolina -- Let's Be Fair About Digital Downloads

Last week, the Winston-Salem Journal published an editorial supporting a tax on digital downloads. The editorial claims that this tax is a matter of fairness. 

We agree that fairness is a good goal to have — which is why we are fighting hard against adding yet another tax burden to North Carolina consumers and businesses.

Contrary to the argument made by the paper’s editors, this new tax ONLY hurts in-state companies, since out-of-state sellers wouldn’t have to collect tax for sales they make to North Carolina consumers.   So the burden of collecting this new tax falls only on North Carolina companies, while any consumers who want to avoid the tax will get their downloads from out-of-state or foreign websites.  Forcing North Carolina businesses to charge higher prices by collecting incremental taxes is fundamentally unfair.

It is also unfair — and unwise -- to claim that digital goods are identical to physical goods.  First, digital goods are not permanent property like tangible goods.  ( If you’ve ever lost your iPod or run it through the laundry, you know what I mean). You can’t re-sell your downloaded game or movie like you can re-sell a CD or DVD. And it’s nearly impossible to play your downloaded movie on your car DVD player. The experience of ownership for digital goods is vastly different from tangible goods, which needs to be taken into account by state tax authorities. 

Finally, the impact that digital goods have on the environment is significantly lower than that of physical goods. When you buy a song on iTunes or a digital book on Amazon, you don’t contribute to creaton of harmful chemicals used to burn a CD, or the destruction of trees used to print a book. You burn no gas driving to the store. You dispose of no plastics or packaging when you get home. According to the Recording Industry Association of America, in 2007 nearly 100 million full albums’ worth of music was digitally downloaded by Americans.  In 2007 alone, more than 200 million pounds of natural resources were saved by US consumers buying music digitally instead of driving to the store for a CD. This works out to more than 380 pounds of natural resources every minute.

The digital economy is growing fast and the tiny carbon footprint of downloads is something that benefits all of us.  Digital downloads are the most environmentally responsible way to get movies, music and software; and tax policy is one of the ways we promote environmentally sound decisions.  For instance, hybrid vehicles are just a small share of the car sales, but nobody thinks we should end tax credits that favor hybrid cars.

The state of New York realized this, and earlier this year shelved its plan to tax iTunes, because it was too much pain for so little gain — only $15M of revenue, and new tax collection burdens that would fall only upon NY-based sellers. North Dakota just went in the opposite direction, explicitly exempting digital downloads from Sales Tax, mainly to increase their state’s attractiveness for economic development. 

So, we echo the call to North Carolina legislators to be fair — fair to their state's businesses, fair to cash-strapped North Carolinans trying to make ends meet in this harsh economy, and fair to our battered environment. Stop the effort to tax digital downloads. 

North Carolina Targets Digital Goods

 In the Whack-a-Mole game that digital  goods taxation  has become, North Carolina is the latest state in which  proposed legislation has popped up.  Right now, North    Carolina’s House and  Senate are considering bills HB  558 and S 487, bills which would create a new  sales tax  on digitally downloaded goods such as books, consumer  information services, and music, such as iTunes  downloads. as well as expand tax burdens on retailers who seek to advertise on North Carolina properties, via an “affiliate nexus” bill.

 NetChoice has been heavily engaged in these debates, both in North Carolina and around the country. Taxation of digital goods is 1) bad for the environment - digital  downloads don’t require a drive to the store, delivery vans, plastics, paper, or packaging; 2) bad for consumers already struggling to make ends meet in a deteriorating  economy, especially one in which online information and services can be used to help them stretch their already-thin dollars; and 3) encourages the scourge of digital piracy --  people should be encouraged to download content legally. Taxing it and making it more expensive only serves to drive more people to readily available, illegal copies of music and movies.

And bills which seek to require any out-of-state retailer that uses a network of affiliates to drive traffic via advertisements on North Carolina-based websites to collect North Carolina sales taxes, would have the unintended consequence of reducing ad revenues for North Carolina companies, including media outlets, without increasing sales tax collections.

Maryland, Virginia, and New York have all flirted with the idea of imposing onerous taxes on innovative, green, and growing component of the economy. Ultimately, they all decided that the negatives outweighed the benefits, and changed or abandoned their plans. NetChoice will do its best to make sure North Carolina joins them.

Photo credit to terren in Virginia via Flickr

North Carolina Bill Could be First Law to Be a "Multiple or Discriminatory" Tax on the Internet

Watch out for a bill that will be heard in committee today in the North Carolina  General Assembly that could be the first example of a tax that on its face discriminates against the Internet. Senate Bill 99 singles-out the Internet ticket resale market for a “privilege tax”, and because it only applies to Internet sales, it violates the federal moratorium on "multiple or discriminatory taxes on electronic commerce.”

The Internet Tax Freedom Act Amendment Acts of 2007 (Public Law No: 110-108) provides a moratorium through November 1, 2014 that bars federal, state and local governments from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and email taxes.

It also prohibits the sort of prima facie discrimination exhibited by SB 99—“Reselling or offering to resell admission tickets on the Internet…”). Because this tax applies to revenues received from Internet transactions but not to offline sales, it clearly violates the Internet Tax Freedom Act.

Here's where it gets even more interesting -- this tax could even be an example of a "multiple" tax. SB 99 imposes a privilege tax on Internet ticket sales that amounts to double taxation. Income earned ticket reselling is already taxed. Companies and individuals that earn revenue from reselling tickets already pay income tax. Moreover, the same ticket could be resold numerous times, resulting in multiple taxation of the same increment over face value.

There are other problems with SB 99 that we lay out in our NetChoice letter, but federal law seems to be clearly against the bill.

-Braden Cox

State legislators seem to be always looking out for the kids. That is, until they stop looking out for the kids

In a yet another misguided attempt to grab tax revenues, there’s a Connecticut bill (SB 806) designed to increase collection of sales taxes when Connecticut residents purchase from out-of-state retailers.  The law re-defines what it means to be a “retailer” in the state, and creates a presumption of nexus when an out-of-state company advertises through Connecticut websites.

Unfortunately, it has momentum and, worse, it comes loaded with unintended consequences.  Let’s look at one.

For years, kids around the country have been collecting box-tops from cereal and snack boxes as an easy way to raise money for school trips and new school equipment. Box Tops for Education has raised over a hundred million dollars -- by collecting just a few cents on every box top.

Now, this fundraising function has gone online, with the Box Tops Marketplace, to generate commissions when parents shop at their favorite e-commerce websites. Here’s the Box Tops Marketplaces webpage:

The Box Tops Marketplace has grown to over a hundred participating websites, offering parenting essentials such as pet supplies, shoes, books, clothing, and household goods.

Online stores that participate in the Box Top Marketplace stores give a percentage of sales to support good causes, including several based here in Connecticut.

Thing is, few of the online stores participating in Box Tops Marketplace have any physical presence in Connecticut, and are therefore not required to collect, file, and remit the state’s sales tax on purchases made by Connecticut residents. Would the out-of-state retailers in Box Tops Marketplace continue to work with Connecticut schoos and PTAs if the state enacts SB 806? Or would they follow the example of nearly 200 retailers who simply stopped their online advertising in New York after that state enacted a similar law?

Keep in mind that online and catalog retailers can avoid the unreasonable burden of collecting and remitting remote state sales taxes by cutting-off their ad spending with Connecticut websites. And Connecticut consumers could still buy from these out-of-state retailers who stop advertising on statebased websites. That means SB 806 could have the unintended consequence of reducing ad revenue for Connecticut-based groups like the schools in this example – without increasing sales tax collections.

Streamlined Sales Tax Legislation Coming Next Week?

The debate over Internet sales taxes looks to heat up next week with the expected introduction of a bill in the U.S. Congress. The proposed legislation is being pushed by the Streamlined Sales Tax Project (SSTP), a group of tax collectors, large retailers, and state policymakers. 

Declan McCullagh of CNET News.com today published a detailed story on the effort by SSTP forces to push this through Congress.  NetChoice executive director Steve DelBianco is quoted extensively throughout the story. 

NetChoice has worked long and hard to oppose SSTP efforts to force catalog and online retailers to collect sales tax in states where they have no physical presence.  We understand the desire by states to find new sources of revenue. But the SSTP has not lived up to its promise of simplification. If adopted, it would introduce complexities and burdens that would raise costs for  many small businesses, who are the lifeblood of our economy and a substantial contributor to the very tax base that states rely upon. 

And these new costs would inevitably drive up prices paid by consumers, who are desperately seeking bargains in this struggling economy. 

New York to Tax Music and Creativity on the Internet

Gov. Paterson unveiled the New York budget yesterday, and among the 137 proposed new and increased taxes is a new tax on digital products.  An article in today's New York Post quoted NetChoice opposing the Governor's effort to tax music and creativity distributed through the Internet. 

New York's approach is two-fold, broadening what is taxed and who has to collect: 1) add digital music, books, songs and movies to what can be taxed; 2) expand and assert the concept of "nexus" to cover out-of-state sellers that use an online network of affiliates

First, New York is imposing a new tax on digital goods. It's not as the state claims, to close a "digital property taxation loophole" -- instead, this is a new tax on New Yorkers, for a service that’s not taxable under today’s law.

What's worse, why in the world would NY impose a new tax on something we all want to encourage right now?  Digital downloads of music, movies, and books have no carbon footprint and use none of the oil consumed with a round-trip to the store. Moreover, there’s no plastic and paper packaging to create and crate off to a landfill. We've blogged on the environmental benefits of downloading here.

It's also important to note that this is more than just a new tax, it will also extend the long hand of government to the long tail of online commerce. Who'll be hurt? Small, independent artists that have websites to sell their own creative works. If a NY-based author or musician adds a link to her webpage saying ‘buy my book/music now on Amazon.com’, she’d be creating a new tax collection burden for Amazon--on everything Amazon sells to anyone in NY State.  Amazon’s not going to sit still for that, and they might just stop their affiliate program for NY-based suppliers, authors, and musicians.

We've blogged about nexus issues here. The gist is that imposing sales tax collection burdens on websites that sell music, movies and games raises Constitutional nexus issues. Merely having a website accessible in a state is not enough to convey general jurisdiction for tax purposes. Usually there's a physical presence required. If New York proceeds along this nexus path, it's reasonable to see it as a new tax burden on advertising, and Madison Avenue's not going to like that!

NetChoice will mobilize our members and NY consumers to take these messages to Albany when the Governor’s budget gets over to the legislature. New taxes like this iTunes tax should be debated in the daylight, not buried in the fine print by a tax administrator.

-Braden Cox & Steve DelBianco

The Great iTunes Tax Grab

CNET's Stephanie Condon writes today: 

"Semantic disputes and other complications aside, the lure of easy revenues--especially if they can be sold to voters as a technical change in definitions rather than a tax increase--continues to lure politicians."

Unfortunately, in this day and age, this means a tax grab by politicians on digital goods such as music downloads off of iTunes or Amazon.

And, despite the popularity of download tax legislation in state legislatures across the country, it has its big problems.  Says Condon...

"Not all online vendors, though, would be compelled by state laws to collect digital download taxes from their customers. Under the legal concept of "nexus," a state generally may only tax a company that has a physical business presence within the state's borders. Translated, that means a company such as Seattle-based Amazon would not be required to collect taxes for the items it sells to San Francisco residents, even if California imposed a digital download tax...

"...Digital download taxes have also been criticized for running businesses out of state. Michelle Steel, a member of California's Board of Equalization, wrote in an editorial in April that if the state were to tax downloads, "Golden State retailers would be at a competitive disadvantage to out-of-state companies....

"...For those companies that do have a physical presence in many states--like Apple--it can be a logistical headache to comply with digital download tax laws in multiple states. That's because many states have varied definitions of what constitutes a digital download and how they may be taxed."

Not only that, but given the price of oil, our foreign dependency issues and environmental concerns, shouldn't we be promoting commerce that uses vastly less energy than driving an SUV across town to pick up the latest Celine Dion album?  NetChoice executive director Steve DelBianco says in the CNET piece:

"With global warming and a world that's running out of oil, the last thing governments should do is add taxes on something that uses no oil and produces no carbon.  A digital download is the greenest way to buy music, movies, and software, since it requires no driving to the store, no delivery vans, and no plastics or packaging."

Indeed, the American Consumer Institute recently reported that:

More than 6.5 billion fewer miles were driven to and from record stores in 2007 as consumers continue to switch en masse from buying CDs to downloading songs via high-speed connections.  Over the past 10 years, the emissions savings from avoided drive time alone add up to 17.6 million tons of GHG.  Demand for plastic CD cases has also fallen as more and more people switch to downloading.  ACI estimates that “6 million tons of emissions have been saved in the last 10 years by reducing the demand for plastic cases,” which are generally made from petroleum.  All told, the switch to downloads from CDs that’s been underway since 1997 translates into a total savings of 23.6 million tons of GHG – a remarkable decrease in emissions”  (PDF of study)

In Case You Missed It...

Several other states are taking notice of New York's new sales tax law and watching the situation closely. California is one state that is considering similar legislation that would broaden online sales tax requirements.

Please see New York's Ambitious Sales Tax Law--Broader Than Amazon and the Internet?

Senators pressed executives from Yahoo, Google, and Cisco Systems on Tuesday to justify their business practices in China and other Internet-censoring countries.

New Jersey’s Governor signed legislation would allow the state to monitor or restrict Internet access by convicted sex offenders.

The Department of Homeland Security leaked a disturbing experiment video which highlights the need to guard against cyber-security threats  to critical infrastructure like power plants and the telecom system.