TechLaw

Online Industry's Take on State Sales Tax Burden

Following on Monday's Online Tax Holiday May Be Ending Soon, there is a nice story today at CNET (Tax-free Internet shopping may be at an end). The story is interesting insofar as it provides some insight into the strategy online companies will be taking to defeat the proposal.

"The states are desperate for new revenue and I think they realize they're straying far from the simplification they originally promised," said Steve DelBianco, executive director of NetChoice, an online industry association, is quoted as saying. "That creates an urgency on their part--to get the federal mandate before it becomes clear they have no intention to simplify." Later: "They have no real intention of simplifying or compensating sellers for the burdens of collecting."

This may be a winning argument with legislators who are philosophically opposed to taxation, or with legislators from tech-sector states. But for the rest of Congress, the online industry is going to have to make a better argument than that. State legislators have no reason not to simplify and harmonize their sales tax systems; they have been working toward this goal for nearly a decade. I would be surprised if the ontological conundrums ("Are Thin Mints a food or candy?") that vexed circa 2003 politicians cannot be readily solved by the brilliant, cash-strapped legislative minds in Washington today.

Nor are states the desperate party here. The desperation (if indeed there is any) belongs to the people who are dependent on state governments for basic public services, health care, and maintenance income. Would it really be a burden to program online payment systems to calculate, collect, and transmit state sales taxes?

Also, sales taxes for online purchases are already a legal obligation in most states. What we are talking about here is whether or not online businesses (and other remote sellers) are going to assist states in collecting taxes that are already lawfully due. Congress can't stop itself from taxing. But it can stop the states from taxing. That's ironic, at least.

Possibly Related Tidbit: Where is President Obama, the guy who wrote a $855,323 check to the IRS yesterday, on this? His new Secretary of Commerce, Gary Locke, was a member of the Advisory Commission on Electronic Commerce, a contentious, 19-member group of government and business leaders charged with the task of making recommendations to Congress on e-commerce tax policy back in 1999-2000. Locke, who at the time was governor of Washington state, believed that the commission should not take positions that would remove a major source of revenue for funding the basic civil services that states and localities provide. He said then that, while he was not an advocate of hampering the electronic commerce industry, he believed the commission should not make recommendations “awarding” a tax advantage to the online industry. He worried that declining sales tax revenues could endanger education funding, noting that Washington state received 48 percent of its revenue from the sales tax. It would be “ironic,” he said, if the growth of electronic commerce, driven by highly skilled professionals, led to a decline in the quality of education.

Online Tax Holiday May Be Ending Soon

Yesterday's rain dashed the last of the cherry blossoms from the trees here in Washington, restoring the banks of the coffee-colored Potomac to their customary dreariness. "What are the roots that clutch, what branches grow out of this stony rubbish?" Good questions, Mr. Eliot. Around here it's legislation and taxes. Like the Main Street Fairness Act, a measure that would allow state governments to collect billions in taxes from online (and other remote) sellers. Supporters say the measure could be introduced in the next few weeks. No more tax-free Amazon purchases? Mr. Eliot, your take on April was prescient. Very cruel indeed.

Just to be clear, I'm talking about that sales taxes that are due on online purchases. You and I are obligated to pay those taxes, but few of us do so. States can't constitutionally collect the taxes from sellers that lack a substantial nexus with the online buyer's state, a consequence of the Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Congress can fix the Quill problem but, so far, it hasn't.

A bit of rhetorical groundwork for passing the Main Street Fairness Act was laid yesterday with the release of a State and Local Government Sales Tax Revenue Losses from Electronic Commerce at a meeting of the Streamlined Sales Tax Governing Board's executive committee. The report estimates that, between now and 2012, states that impose sales taxes will lose as much as $52 billion in uncollected taxes on e-commerce transactions. That's a lot of money to cash-strapped state and local governments. The report makes several arguments for the unfairness of the status quo:

• states are entitled to the tax revenue under current law, they just can't effectively enforce the tax obligation without congressional assistance;
• state sales tax considerations are skewing business decision-making, with some businesses locating operations based on tax considerations rather than operational efficiency;
• lack of enforceable state sales tax regime puts brick-and-mortar businesses at an unfair advantage relative to online businesses; and
• the status quo is regressive, because poor purchasers are more likely to patronize brick-and-mortar businesses where state sales taxes are collected.

The report was written by Donald Bruce, William F. Fox, and LeAnn Luna, all of the University of Tennessee. More information about the Streamlined Sales Tax Project is available here.

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Cinderella Stories

When it comes to college sports, I always root for Michigan, I can't help it. I always pick them to win it all, even though the last time Michigan won anything was when Chris Webber was on the payroll in 1993. The fact that I am wrong, that I have been wrong for 18 years in a row, means less to me than the pleasure I get from picking Michigan to win it all.

Last night when I finally finished filling out my NCAA basketball tournament brackets (I have Michigan defeating Memphis in the title game), it occurred to me (it was late!) that the way I think about the basketball tournament -- my love of the underdog and my selective memory -- is similar to the way a lot of us view tech policymaking. And that's a bad thing. We tend to cast tech policy matters in terms of win-lose affairs, deluding ourselves into thinking that they will be close, hard-fought close contests. Emotionally, it is satisfying to entertain the idea that the underdog will win. Marketers vs. Privacy Advocates. "Innovators" vs. Telco Operators. IP Owners vs. Fair Use Advocates. But these are never close contests. The same teams always win. What a facile way to look at law.

In sports, as in much of life, we love to root for the underdog. Hoosiers, Rudy, Rocky. It's all the same. Somebody we can identify with lands the big punch, makes a long run, hits the last-second shot and in the process pulls off an improbable yet emotionally satisfying victory.

This is a psychological booby trap that can kill you at tournament time. And in handicapping politics.

That's why they call it March Madness. Delusion is a form of madness. Very few of us possess the hard data necessary to pluck out the best teams among this year's 64 entrants. We have only our emotions. When it comes to filling out our tournament brackets, the exploits of underdogs past loom large in our memories. We remember the underdogs, not the winners.

Not many people remember who won last year's tournament. But everybody remembers Davidson's Stephen Curry draining threes against Gonzaga, Georgetown, and Wisconsin, en route to a two-point loss to Kansas in the Midwest Regional Final.

In 2006, the role of Cinderella was played by George Mason, a small school just south of Washington, D.C., which made it to the Final Four that year, stunning college basketball bluebloods Michigan State, North Carolina, and Connecticut along the way.

Cherished memories of the underdog's rare victory obscures the fact that, in nearly every contest, the favorite wins. David's late, lucky shot against trash-talking Goliath has totally overshadowed the fact that the Philistines dominated the Jews for a generation before that.

The favorite always wins. Three-quarters of the time, anyhow. Perhaps you'll recognize this list of recent tournament winners: Kansas (2008), Florida (2007), Florida (2006), North Carolina (2005), Connecticut (2004), Syracuse (2003), Maryland (2002), Duke (2001), Michigan State (2000), Connecticut (1999), and Kentucky (1998). Not an underdog in the bunch.

Just for facile fun, I've made up a list of the 16 teams I'd put in a hypothetical Tech Policy Bracket. And I've ranked them -- "seeding" in tourney jargon -- according to who has the better record and best prospects for success this year. This list isn't about who I want to win but who has actually been winning these games. All games will be played in Washington, of course.

(1) AT&T. Perennial top seed. Plodding, methodical team. Likes to Big Foot opponents, offense consists mostly of dunks.

(2) IP Owners. Recruits some of the best talent in the country, players have a reputation for flopping. Always pleading with the NCAA for rule changes.

(3) Business Lobbyists. Persistent, in-your-face defensive specialists. Along with AT&T and IP Owners, among the largest donors to the Referee Retention and Retirement Fund. Tends to get the close calls.

(4) Google. Literally came out of nowhere, boasts a "Beat us if you can" attitude. Relationship with referees will be key.

(5) Amazon. Like Google, made it to the Big Dance on hustle alone. Will shoot from anywhere on the court.

(6) Online Marketers. Rarely defeated, they still play with a chip on their shoulder. They love to run up the score on inferior opponents.

(7) White House. Story here is Barack Obama. Lit it up last fall, untested on the big stage.

(8) Apple. Flashy, high-scoring, can beat you with hardware or software. Rabid fans.

(9) Free Software. Fundamentally sound. International fan base. Plays to sellout crowds, possibly due to free ticket promotions.

(10) Bloggers. Reputation for trash-talking and making long shots, players frequently play in their pajamas.

(11) Federal Trade Commission. Fundamentally sound with lots of offensive firepower, but very rarely uses it.

(12) State Legislatures. Historically a powerhouse, lately has fallen on hard times. Resourcefulness is going to be key to victory.

(13) Newspapers. Coping with deteriorating training facilities and loss of alumni support, this year's team is wearing uniforms purchased in 1989.

(14) ICANN. Getting it done with smoke and mirrors, this team often plays abroad. Spends a lot of time on public relations.

(15) Internet User Advocates. Talented but underfunded, the players on this team have not yet learned to play together.

(16) Internet. A hardy opponent, often taken for granted.

(Going to the NIT this year: Microsoft, Yahoo!, Dell, Research in Motion)

Looking to the first round games, I see AT&T (1) easily getting past Internet (16) with a combination of throttling, traffic management, and content deals. The Apple (8) - Free Software (9) matchup is too close to call, I could go either way on it, but I would love to see Apple meet AT&T in the second round. Amazon (5) is going to have a lot of trouble with State Legislatures (12), and I don't see them being able to turn back State Legislatures' need for tax revenues, especially in these tough economic times. Google (4) has been killing Newspapers (13) for years now; that should continue in this game.

The Online Marketers (6) matchup against Federal Trade Commission (11) is game you'd think would be a close one. But historically Online Marketers have won every time. I see them getting through to the next round in easy fashion. It's also a safe bet that Business Lobbyists (3) will crush ICANN (14) in what I see as a low-scoring, defensive battle. I'll be very surprised if ICANN gets makes any of its new gTLD shots.

White House (7) versus Bloggers (10). It's a shame they had to meet in the first round, since Bloggers were so instrumental in Obama's win last fall. I'm going to give this one to White House. Having the Commander in Chief on your team has got to count for something.

The final first round game, IP Owners (2) vs. Internet User Advocates (15), is shaping up to be another walkover. Internet User Advocates didn't score a single point in the Copyright Term Extension Game and scored just a handful of points in the Digital Millennium Copyright Game. No matter how much publicity is given to this game, the fact is that if it wasn't constitutionally required IP Owners and Internet User Advocates wouldn't even be on the same court together.

My Final Four is AT&T, Google, Business Lobbyists, and IP Owners. After that, I don't see Google getting past AT&T. Maybe next year. In the other semi, IP Owners' greater experience and depth, combined with an overwhelming need to win, should get them through to the final. An AT&T-IP Owner final is really too close to call. I've been hearing for years that, if they had the opportunity, they'd cut a deal and share the title. Not this year. My pick: AT&T.

Go Blue.

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Follow me on Twitter at @bnatechlaw