"Let's face it," said Kostenbauder, "the Net is already taxed. It's just a matter of collecting it." Therein lies the rub, according to Jon Peha, an associate professor of electric and computer engineering at Carnegie Mellon University in Pittsburgh. "Technology can get you most of the way to solving the problem," said Peha. "That's not the biggest problem, though. Making it enforceable is the biggest problem." How to tax the Internet While politicians bicker and e-tailers quiver, one man may hold the solution in his hands By Alan T. Saracevic EXAMINER TECHNOLOGY WRITER http://www.examiner.com/991219/1219taxes.html ---------------------------------------------------------------------------- ---- Daniel L. Sullivan is the antithesis of dot.com cool. He comes across more like a friendly college professor than a man who could change the course of e-commerce. Sullivan says he knows how to tax the Internet. As the debate over the possible taxation of the Internet played out in San Francisco last week, Sullivan calmly bided his time. After hours of testimony and proposals - all advocating or attacking Net taxation, it was finally his turn to address the 19-member congressional committee assembled to discuss the issues. In a five-minute, highly technical presentation, Sullivan demonstrated how his company - Taxware International Inc. of Salem, Mass. - would collect tax on cyber sales from every jurisdiction in the United States - taking into account an estimated 7,500 state and local taxing authorities. As quickly as Sullivan's pitch started, it was over. No follow-up questions. No discussion. The slightly fazed committee members went back to the charged rhetoric of the debate. "We have software that can be used to tax the Internet," Sullivan said in an interview after his presentation. "For any of the proposals put forward, our technology can act as the mind and heart of the solution." Taxing the Internet has become the next, logical step in the growth of e-commerce. The industry's hot growth pattern has caught the attention of government officials who want a piece of the action. In turn, it's become a highly politicized topic. Shut out ======== To date, state and local governments have been effectively shut out of collecting sales and access taxes, mainly due to the Internet Freedom Act of 1997. Although the law does not prohibit the collection of sales taxes on the Net, it did place a moratorium on taxes that target Internet access services and banned the creation of new or discriminatory laws pertaining to e-commerce. Although some e-tailers collect sales tax, most don't, saying they don't conduct business in one state or another, but rather their cyberspace transactions are interstate commerce, which is not subject to local and state tax laws. State and local government officials beg to differ, saying if Net transactions are left untaxed, the resulting erosion of their tax bases could have a serious impact on local revenues, and subsequently, local services. The debate centers on where an e-commerce store is based or where the transaction is conducted. The billion dollar question: Who gets to collect taxes on e-commerce transactions? To help answer that question the Internet Freedom Act also created the U.S. Advisory Committee on Electronic Commerce with the mandate of studying e-commerce in relation to taxation. The congressional committee met in San Francisco last week and heard 14 proposals on Net taxation. The group will hold one more hearing on the topic in Dallas in March, making for a total of 37 proposals, before delivering a report on April 1. Political battle ================ The committee has become polarized, pitting free-Net capitalists, led by chairman Gov. Jim Gilmore, R-Va., who propose an indefinite moratorium on Net taxes, against states' rights advocates, led by Gov. Michael Leavitt, R-Utah, who want to make it possible for states to collect sales tax on goods and services bought online. To Sullivan, it doesn't really matter who comes out on top. Not politically inclined either way on the topic, Sullivan ended up before the panel because he's the only one who can offer a real solution right now. The competition is not far behind, though, and there are certain to be more players in the tax collecting business soon. The primary competition is Vertex Inc. of Berwyn, Pa. Like TaxWare, Vertex offers standalone software for corporate use. Its eTax Central software, which will be tested early next year, performs essentially the same service TaxWare does. On the horizon, NationTax Online Inc., of Birmingham, Ala., and esalestax.com, of Englewood, Colo., are working on similar programs that would calculate state and local taxes. Both are in the development phase with rollouts expected in mid-to-late 2000. Sullivan realized back in 1996 that his company's software - used by hundreds of large corporations to track their state and local tax obligations - would work just fine in cyberspace. "We have thousands of companies that use us," said Sullivan, "from Fortune 100 firms to small businesses. In fact, of the seven (ACEC) committee members who represent commercial interests, five of them use our system." Those connections put Sullivan in touch with Leavitt, who has authored a plan entitled "Streamlined Sales Tax System for the 21st Century." Leavitt's plan seeks to establish a voluntary sales tax system that would enable states to collect sales tax from e-commerce vendors through a trusted third-party (TTP) collection agency. State and local governments would be responsible for paying all costs associated with the system on a per-transaction basis based on negotiated rates. The system would be implemented through a combination of uniform legislation and multistate agreements among participating states. No federal intervention would be required. Taxman's software ================= According to Sullivan, the only system currently capable of handling such complex collections is his Taxware software, presently called the Transaction Tax Server, pending patent. "It's a very complex technical solution which simplifies a complex tax universe," said Sullivan. TTS is a combination of existing Taxware software used during the various phases of tax collection. When an online sale takes place, the system identifies a buyer's location, assesses what taxes are due on the transaction, then provides the vendor with the appropriate tax filing papers. Here are the specifics on how TTS would work: 1. An online buyer orders a product or service from a virtual merchant. 2. When finished shopping, the buyer provides an address for shipping. 3. If the buyer is getting a digital product, the credit or debit card billing address used in the sale would be applied as the taxing location. 4. The merchant then transmits this shipping information to the TTS system, which calculates the appropriate tax on the transaction. 5. The tax information is then reviewed by the buyer, who will either approve the tax or cancel the transaction. 6. If finalized, the buyer is charged the agreed-upon tax. 7. The seller, through the credit card or banking network acting as the third party intermediary, will receive the revenue generated from the transaction. The appropriate tax authorities will receive the calculated tax amounts. Finally, both seller and the tax authority will receive information on the transaction for possible audit situations. According to the Leavitt plan, state governments would pay for putting TTP into place. In other words, e-commerce merchants would bear no cost other than paying the actual taxes. So what's so special about Sullivan? Couldn't anyone track these transactions? Not really. There are approximately 7,600 tax jurisdictions spread across the U.S., and no other company claims to have them solved and sorted. "We're pretty much the only ones doing this for e-commerce," said Sullivan. "We spent 10 years researching tax jurisdiction and products. No one else has." Too complex? ============ While he may sound convincing, there are some who don't buy his view. "The argument that software will solve the problem is foolish," said Fred Smith, president of the Competitive Enterprise Institute in Washington, D.C., and a staunch opponent of taxing the Net. "We're dealing with a decentralized system - millions of people going in different directions." "I used to work for the railroads as an economist," said Smith, "and they were interested in finding out how trucks were taxed, state to state. It was incredibly difficult to figure out, and that's just one industry." Difficult, yes. Impossible, no, said Sullivan. "We've been tracking local tax rates for almost 20 years. We've had thousands of people use it." One of them is computing giant Hewlett-Packard of Palo Alto. "We use it to calculate sales and use taxes we're required to collect across the entire United States," said Dan Kostenbauder, general tax counsel at Hewlett-Packard, "including almost all of our e-commerce initiatives." "Let's face it," said Kostenbauder, "the Net is already taxed. It's just a matter of collecting it." Therein lies the rub, according to Jon Peha, an associate professor of electric and computer engineering at Carnegie Mellon University in Pittsburgh. "Technology can get you most of the way to solving the problem," said Peha. "That's not the biggest problem, though. Making it enforceable is the biggest problem." That's someone else's bag, said Sullivan, who's remarkably blas about whether his company will or will not become the engine that drives Net taxation. "It doesn't matter to me," said Sullivan. "We're a $20 million company growing at a rate of 30 to 40 percent a year without any involvement in these proposals. "I think the present moratorium is not a bad idea, nor are the other plans. In reality, they're not incompatible."
