Digital commerce activity monitor BizRate.com polled over 3,500 online consumers to measure the impact of e-commerce taxation. The poll, which was taken during the summer of 1999, showed split results. Over 37 percent of the respondents said they would not have made their purchases online if sales tax had been included. Another 37 percent said they would have, while 26 percent said they did not know if they would have purchased the item online if tax had been included.

E-Commerce Taxation Could Mean Growing Pains
According to Datamonitor, industry analyst experts, sales over the Internet will grow to $200 billion by the year 2001. However, the rate of growth of online spending per person is declining even though total online retail spending is increasing, according to a study conducted by The Wharton School of Business. The study also found there is a significant dropout rate among online shoppers, and 15 percent of online buyers from 1997 did not buy online in 1998.

"No matter how well electronic retailers have done this holiday season, there are some fundamental factors that appear to be eroding the growth of spending and growth of the market," said Jerry Lohse, research director of the Wharton Forum on Electronic Commerce. "Only 50 percent of the dropouts from 1998 returned to make purchases in 1999. Further, new buyers are not arriving as quickly to take their place," Lohse continued. "The implication is that online shopping is just another way of shopping.

According to the study, concerns about privacy and trust were among the most important factors that distinguished buyers from non-buyers online.

Who is Liable?
So, what is all this hype about taxing online shopping? In October 1998, The Internet Tax Freedom Act was signed as public law. The Act was based on the simple principle that information should not be taxed.

In addition, a commission was established to study electronic commerce tax issues, whether electronic commerce should be taxed, and if so, how it can be taxed in a manner that ensures that such commerce won't be subject to special, multiple, or discriminatory taxes. State and local offices were given a prominent voice on the commission. However, Congress retains full authority to change or discard the Commission's proposals. There is also a sense in Congress that there should not be any federal taxes on Internet access or electronic commerce.

Virginia Governor James Gilmore III is the chairman of the commission. He has been appointed the daunting task of advising Congress on the taxation of electronic commerce. The moratorium for taxes is for three years which, according to Gilmore, was set up so that the Internet would have enough time to grow and the commission would have enough time to come up with an acceptable public policy with respect to taxation on the Internet. The Commission is expected to issue its recommendations to Congress in April of this year.

State and Local Governments Say Yes to E-Commerce Taxation
It seems that state and local governments are very much for taxing electronic commerce but the problem is that sales, use and income tax based on physical location and property are difficult to apply to the Internet.

According to 15 U.S.C. section 381, a state may not collect income tax from a business that merely solicits orders in that same state. Before a state may impose a tax, there must be some connection between the taxpayer or the taxpayer's activities and the state that is sufficient enough to allow the state to exercise jurisdiction over their person (commonly referred to as a nexus). While the required nexus is similar to grounds for personal jurisdiction, sales and use tax often require that a person or business be physically present in the state be fore such a tax can be imposed.

According to a report issued by Ernst & Young, many state and local officials fear that the e-commerce boom will lead to erosion of the state and local retail sales and tax base, while e-retailers want to avoid the administrative cost of implementing various regional and local tax rate systems.

David Hardesty, vice president of Markle Stuckey Hardesty and Bott, a San Francisco and Larkspur, CA based CPA firm, and contributing author to E-Commerce Tax News, sees several problems associated with taxation of e-commerce.

"A vendor operating out of a bedroom does not have the staff to deal with the tax rules of over 30,000 state and local authorities in the USA and an untold number of foreign tax authorities," said Hardesty.

He adds that another problem is the proliferation of digital products. When a product, such as software, can be delivered electronically there is no need to know the location of the buyer to complete a transaction. The seller only needs a credit card number. Hardesty says vendors must make an effort to gather information that is needed for tax compliance when selling digital products in states where those products are subject to sales and use tax.

Whatever the issues are with taxing or not taxing e-commerce sales, there are pros and cons for each. What effect taxation will have on e-commerce sites is yet to be determined. However, Congress has its hands filled with these issues and will soon let everyone know what the verdict is.