A Hex on Your Taxes

By Romesh Ratnesar

Call him a relic, but Clifford Waldeck likes doing business off-line. His 5,000-sq.-ft. office-supply store in downtown San Francisco rings up about $1.6 million a year selling paper clips and printer cartridges to customers from the nearby financial district. "Our business is based on people being in the neighborhood," he says. But Waldeck fears his walk-in patrons will soon realize that they can buy all the stationery they want from stores on the Internet--and never pay a dime of sales tax. As vice mayor of Mill Valley, a San Francisco suburb, Waldeck has another reason to be irked. Tax-free e-commerce transactions could ravage his city's sales-tax revenues. "I feel like I'm being double hit," he moans.

And so Waldeck and scores of big and small businesspeople like him last week vented their frustration over one of the new economy's most combustible issues. Their forum was a hearing in San Francisco held by the 19-member advisory commission on electronic commerce, a congressionally created panel that has until April to recommend a policy on how to handle Internet taxation after Congress's three-year moratorium on e-commerce taxes expires in 2001.

The debate has become a crash site where business, politics and technology collide. It's a bad scene for civic-minded policymakers and a grand opportunity for electioneering candidates. "Some people decided early on they...weren't going to budge," says Oregon Senator Ron Wyden. "The whole process has become thoroughly politicized."

Given the billions at stake, that comes as no shock. Because e-tailers have no "physical presence"--such as a store or warehouse--in most states, they are not required to collect sales tax from customers. (They're supposed to pay the tax themselves, but no one does.) Web business owners argue that this is fair, since their companies don't benefit from services funded by sales taxes, such as garbage collection and policing. But state and local governments howl that the $10 billion a year in tax revenues they expect to lose to the Internet by 2003 pay for the roads that online merchants use to deliver their goods to customers. Bricks-and-mortar executives fume that the absence of e-commerce taxes makes their sexy online competitors look even more irresistible. Slow out of the gate, lobbyists for those forces are gaining clout on Capitol Hill.

They need it. G.O.P. leaders have loaded the advisory commission with antitax ideologues like former Microsoft lobbyist Grover Norquist and Virginia Governor James Gilmore, the commission's chair, who has proposed a permanent ban on Internet taxes. That idea is opposed by the Clinton Administration and a group led by Utah's Republican Governor Michael Leavitt, which favors an Internet tax system. The commission, which is considering a broad range of e-commerce issues, is headed for a stalemate on this one. Says panelist John Sidgmore, vice chairman of MCI WorldCom: "We're going to agree on just about everything except the sales tax."

That's fine with the four major presidential candidates, who don't want to upset their high-tech contributors. John McCain has vowed to "keep the Internet tax-free forever"; George W. Bush has not taken the same pledge but is unlikely to back any new taxes. Democrats Bill Bradley and Al Gore won't say never to online taxation, but both support keeping the Net tax-free through 2001.

Yet keeping the status quo could have risky consequences. Leaving e-commerce untaxed amounts to a bonanza for Web entrepreneurs and Americans who own computers with Internet access. Within a few years, low-income customers could end up paying a disproportionate share of state and local taxes at stores like Waldeck's Office Supplies. That's if they still exist. Clifford Waldeck says he now makes 7% of his sales through his company's newest feature, its website.

--Reported by Sally B. Donnelly/Washington and David S. Jackson/San Francisco

With reporting by Sally B. Donnelly/Washington and David S. Jackson/San Francisco