The Hidden Cost of Internet
by: Cary Christian
I don't know how many of you
have been following the status of Internet taxation. Most small business
people are too concerned with running their business and making a profit and
tend to ignore these arguments. While that is perfectly understandable, it
could also be a costly mistake.
A LITTLE BACKGROUND
Internet taxation would really be nothing more than the imposition of sales
tax on sales over the Internet. "No big deal," some of you will say.
After all, sales taxes do not really affect a business that adversely, do
they? You become a collection agent for the government. Your competitors are
collection agents, too, so they have no advantage over you. Consumers expect
it and do not normally factor it into their purchase decisions. So it's more
red tape but not really an additional cost.
Not exactly. Let's step back a moment and look at our macro tax situation in
the U.S. for an example. The United States actually has a low tax rate in
comparison to the rest of the world. But when people look at the rate of
taxation in the U.S. they generally only look at the income tax rates. Yes,
you pay federal income, state income, local income and social security taxes
and those rates are not that bad.
But one-half or more of every dollar you spend on gasoline represents
federal, state and local tax on gasoline. Half (or more) of the price of
cigarettes and liquor is tax. Take a look at your telephone and electric
bills. More taxes. Pay tolls to use any of the roadways in and out of your
city? More taxes.
Then there are permits and
licenses when you are born, when you start a business, when you own a house,
when you get married, when you sign up for garbage collection, and when you
die. (I probably missed a couple of hundred other examples of permits and
And, of course, there is the sales tax on almost everything you buy.
Additionally, taxes are a cost of doing business so everything you buy has
already been marked up to reflect the tax burdens on the businesses
producing the products you buy!
I did a study on the real cost of taxation to the average American a few
years ago. I don't have the final numbers in front of me, but suffice it to
say that the real rate of taxation of U.S. citizens is at least double what
the average person thinks it is. And it's no better, and often worse, in
other parts of the world.
The worst part is that most of these "hidden" taxes are regressive in
nature, meaning they tax the poor at a disproportionately higher rate than
State and local governments are facing lost tax revenues because more and
more people are purchasing tax-free on the Internet. That is why Internet
taxation is an issue in the first place. But I believe people everywhere
deserve the break. Let us have something in life that is tax free.
But that is still not the issue I want to address. All of the above sounds
bad, but we haven't even scratched the surface!
THE REAL PROBLEM
If you have never worked with multi-state or multi-national sales tax issues
before, you probably don't know how technically challenging and difficult
they can be. States fight all the time over who has the right to assess
sales taxes on particular transactions. The only problem is they don't fight
each other; they levy the tax on you and YOU have to fight each state
involved individually or end up paying tax on the same transactions in
multiple jurisdictions. And, of course, since you probably only collected
and paid the tax to one state, you'll owe substantial penalties and interest
in the others.
The Internet taxation moratorium was extended for another two years on
November 28, 2001. Hopefully, this will provide enough time to simplify the
administration of Internet taxation before it becomes a reality. If it
doesn't, every small business that sells on the Internet will need to make
sure it has two things:
1. Sophisticated and impeccable accounting systems to accurately
track sales tax liabilities and provide documentation for audit (money), and
2. Access to top-notch lawyers and accountants to guide them through
the mine fields of state sales tax audits (more money).
Make no mistake about it, a sales tax audit can put a small business OUT
of business PERMANENTLY.
Small businesses need to use the two years provided by the moratorium to
become educated on the issues and involved in their resolution. Getting a
permanent moratorium is most likely not going to happen. Getting some sane
laws on the books ought to be possible. Together, our voices can be heard.
We need to lend our voices to those who are calling for reasonable and
simplified solutions before it is too late.
Copyright (c) 2002