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The Hidden Cost of Internet Taxation
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.


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 licenses there).

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 the wealthy.

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!


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


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