WASHINGTON -- So, you're sitting home in your pajamas ordering Christmas presents over the Internet and feeling smug. You've avoided the mall parking lot. And, even better, escaped the state sales tax.
Savor the moment. Tax-free e-shopping might not last much longer.
States are determined to retain and even expand their taxing authority over internet sales, even as promises to ban or eliminate the levies on the myriad forms of e-commerce are emerging as an issue in the 2000 presidential race.
And if the controversy, which crosses party and ideological lines to pit the old economy against the new economy, ends in stalemate, odds are the state tax collector will win.
"We're not giving up our sales tax," vows Maryland Comptroller William Donald Schaefer. Getting rid of the tax "sounds like good politics, but you have to think of what the impact would be both on government services and local retailers."
Politicians from both parties are calling for a ban on taxing Internet transactions, contending that this new form of commerce ought to be allowed to develop freely without the burdens and disincentives of taxations.
"The Internet is the greatest engine of economic growth of our time," says Sen. John McCain of Arizona, a Republican presidential hopeful. "We must resist the temptation to choke off the Internet's tremendous capacity by imposing taxes on those who use it."
Internet sales are still only a small portion -- less than 1 percent -- of total retail purchases in the nation. But e-shopping is increasing so rapidly that McCain estimates Americans will spend $4 billion online this holiday season.
By 2003, the loss in sales tax revenues to state and local governments could range up to $10 billion, said Michael Mazerov of the Center on Budget and Policy Priorities. "That's real money" that states might try to make up by taxing non-Web shoppers even more heavily, he said.
A national commission meeting in San Francisco this week has been charged with studying the issue and making a recommendation to Congress next spring. But the panel, composed of federal, state and local elected officials, business executives and anti-tax advocates, appears too deeply divided to reach a consensus.
With or without a recommendation, Congress is unlikely to take action on the issue until after next year's election. A current three-year moratorium on the imposition of new Internet taxes remains in place until Oct. 1, 2001.
There apparently hasn't been much controversy over banning taxes on Internet access, which few states have contemplated. Congress might also eliminate the 3 percent federal excise tax on telecommunications.
Rapidly changing market
But the days of filling up virtual shopping carts with tax-free consumer goods seem to be numbered. The retail market is changing so fast that distinctions that have allowed Internet sales to evade the tax man are blurring.
"Even if Congress does nothing to help us collect taxes, we think the market's going to solve the problem if we just let the thing play out," said Ray Scheppach, executive director of the National Governors' Association.
There is no such thing as tax-free shopping in Maryland or most other states. If out-of-state retailers fail to collect Maryland's 5 percent sales tax on Internet or catalog purchases, the customer is legally bound to pay the state directly. Almost no one does that, partly because people don't know they are supposed to, but mostly because the state has no means of tracking purchases.
The Supreme Court ruled in 1992 that states could not reach beyond their borders to require out-of-state catalog retailers to collect the tax for them at the time of the sale. As a result, Maryland catalog shoppers pay the tax on items from Maryland-based firms, such as Jos. A. Bank, or national retailers with outlets here, such as Sears. But Maryland taxes are not collected on catalog purchases from out-of-state operations, such as Maine-based retailer L.L. Bean.
The same rule is generally applied to Internet purchases. For example, Amazon.com, the retail giant that offers its products exclusively online, charges sales tax to residents of the state of Washington, because the company's corporate offices are in Seattle.
Marylanders who purchase items from Amazon.com owe Maryland sales tax on those items. But neither Amazon.com nor most other online retailers tell shoppers that. In fact, some Web shopping sites boast that their goods are free of sales tax, though technically they are not.
Last summer, Schaefer began posting revenuers at truck weigh stations near the state's borders. They are on the lookout for big stuff -- furniture, appliances, giant screen TVs -- that Marylanders have ordered from out of state.
If the tax police find such items and there's no indication the sales tax has been paid, Schaefer sends the purchaser a dunning letter.
Only about $26,000 worth of unpaid taxes has been collected.
"Anything that comes through the mail, we have no way of knowing about," Schaefer said.
