Online Tax's Impact Debated: E-biz Issue Gains Weight Among Presidential Candidates

WASHINGTON, D.C.-Taxation certainly won't mean the death of the Internet sales marketplace in the U.S., but it could put a chill on the sector, according to a BizRate.com survey presented at a Sept. 14 meeting of the congressionally created Advisory Commission on Electronic Commerce.
The survey found that some 75% of online consumers would be less inclined to shop the Web if they were faced with paying taxes on purchases made there.
On the other hand, the establishment of guidelines for taxes offers a prescription for healthy competition for business as a whole, say retailers. They argue that the lack of a clear policy on the subject now makes for an uneven playing field-and confusion for those "click-and-mortar merchants" who have both on- and offline stores.
"As an organization associated with a brick-and-mortar operation, we are very keen to see some clarification on this," says Glen Ward, president of E-commerce for the Virgin Entertainment Group. The company levies California tax on online purchases made in that state, since it is based there.
"As a responsible retailer, we abide by all the legislation that currently exists, and we are seeking that clarification to lead to a level playing field," Ward says. "We believe that with a clarification to both merchants and consumers, that will enable us all to be trading on that level playing field."
Marcia Appel, senior VP of communications and corporate advertising for the Musicland Group, adds, "As it now stands, companies just selling online are given a grace period on this question. Companies with different configurations had to grapple with the issue more." The company operates more than 1,300 stores.
The debate, which first gained hold after Congress created the advisory commission to study the issue (Billboard, July 3), is back in the headlines following introduction of a bill that would make the Internet a "tax-free zone."
It now promises to gain steam as an election-year issue in the U.S., with presidential candidates lining up pro and con on a subject close to the hearts of retailers.
Their stances could prove important, according to another poll released Sept. 14. Thirty-six percent of registered voters who are active Internet users would be less likely to vote for a political candidate who supports online taxes, according to the poll by the Gallup Organization and plan, an online market research firm. Overall, more than 70% of active Internet users oppose the idea of levying online taxes, the poll found.
The sponsor of the no-tax legislation, Sen. John McCain, R-Ariz., formally announced his candidacy for president on Sept. 27.
THE OPTIONS
The four-term senator's bill, S. 1611, would amend the Internet Tax Freedom Act, which he co-sponsored, to make permanent the current three-year moratorium on Internet sales and "uses" taxes (Billboard, Oct. 2). McCain cited the advantages of a "tax-free zone" for Internet growth to create new jobs and opportunities for businesses.
Many Internet and online-only merchants have greeted McCain's bill with enthusiasm, since electronic merchants are expected to produce more than $100 billion in revenues by 2003.
Commerce Committee members will have to choose between McCain's bill and one introduced last summer, which calls for a 5% across-the-board tax for Internet and traditional catalog sales.
That bill, "The Sales Tax Safety Net And Teacher Funding Act," S. 1433, was introduced July 26 by Sen. Ernest Hollings, D-S.C., the ranking Democrat on McCain's committee. Hollings says he wants to use the revenue to help fund educational programs.
Comments by spokesmen for the two lawmakers set the tone for the debate. "What's not to like?" says a McCain policy planner.
A spokesman for Hollings, however, takes the opposite stance. "Yeah, what's not to like-unless you're a local municipality that desperately needs this untapped revenue for teachers and programs to educate our kids."
Despite the educational connection of the Hollings proposal, it's hard to imagine Republicans not taking eager advantage of a pro-business, no-tax stance to underscore their "less government" philosophy, especially in a presidential campaign year.
It's too early to tell if the Hollings bill will resonate with other Democrats, but at least two Democratic presidential candidates have put themselves in the no-tax camp.
Vice President Al Gore, according to a spokesman, "was the primary administration supporter of the Internet Tax Freedom Act, and he absolutely supports that measure. But the vice president doesn't want to prejudge the work of the commission, which will hopefully provide a solution that will allow Internet and E-commerce to flourish."
A spokesman for presidential candidate and former Senator Bill Bradley says simply, "He's against any tax now on the Internet; he thinks it's way too early."
Republican front-runner George W. Bush is steering a middle course. A spokesman at his campaign headquarters in Austin, Texas, says the candidate "supports the current three-year moratorium and will study the recommendations" of the advisory commission, which must report its findings to Congress next April.
Neither the McCain nor the Hollings bill has yet been scheduled for a Commerce Committee hearing, according to Hill staffers. Insiders say that with the 106th Congress expected to adjourn in November-and with McCain hitting the campaign trail as much as he can even sooner-the E-tax issue may get more of an airing this year in campaign-related sound bites than in the committee hearing room.
"SHOPPING-CART ABANDONMENT'
Those sound bites will resonate well with the majority of Internet-savvy Americans on the campaign trail, according to Paul Bates, VP of the information products group at BizRate.com, a Los Angeles-based E-commerce ratings and research company. The firm surveyed 7,000 online buyers Sept. 1-2 about online sales and taxation. The survey was done in partnership with the Assn. for Interactive Media (AIM), an independent subsidiary of the Direct Marketing Assn., which acts as an Internet advocacy group in Washington. AIM opposes the imposition of taxes.
According to BizRate, just over half of online buyers-55%-are aware that Congress is evaluating the need for Internet taxation. Most online buyers do not approve of the idea; 75% of online buyers said they would make fewer purchases online if taxes were imposed.
The entertainment sector would be affected, according to Bates, even though its products are relatively lower-priced and would carry a lower "tag-on" tax.
Bates says that the music sector is one of the areas with the highest likelihood of levying online taxes. Music items are 33% more likely to have sales tax imposed than are other product categories, he says, adding that 16% of music buyers surveyed reported they had paid tax on their most recent purchase, as compared with 12% of overall online buyers.
Of the 84% who said they did not pay sales tax on their music purchase, 53% said they would have "bagged it" if they had been faced with a tax, Bates says.
"When you do the math on a dollar-and-cents basis, it doesn't seem like it would have that much of an impact," Bates says. His company found an average "entertainment-category" shopping cart was $51; imposition of an 8% tax on that would raise the check-out cost to $55.
"But it's very clear that imposing a tax brings with it the perception that the customer is losing one of the major price benefits of buying online, and that just exacerbates what we have already seen about how price-sensitive the online sector has gotten," Bates says.
So-called "shopping-cart abandonment" already is a telling factor in the online sales realm, he notes. "The shipping and handling charge drives a great deal of that abandonment," Bates says, as customers get to the bottom line and see the tag-on to their tally. "I would imagine that the tax at the end would also be a factor in spurring that."
What BizRate's survey did not examine was whether the items that were left in the virtual carts would instead be rung up at actual registers.
"That's what we'd really like to know," says an executive at a click-and-mortar chain who asks not to be identified. "Are we losing the sale [if taxes are imposed], or just moving it [to the store level]?"