Hungry States Eye Web Sales Taxes, Net Casinos

From e-tail purchases to possible new online gambling options, state governments are pushing to impose added Web taxes. CIO.com's Bill Snyder explains how this could hit your wallet.

I'm such a poor horse picker that thoroughbreds I bet on last week are still running. My poker skills are a little better, and I confess that now and then I play online and even win a bit. But as you probably know, online gambling isn't legal in the United States, and we electronic card players are forced to take our business to digital casinos based in the Cayman Islands or other offshore venues. The good news is that Congress is considering a bill that would bring Internet gambling back to the U.S.A. The bad news, no surprise here, is that it would be taxed.

The gambling tax is just one of a bevy of proposed levies aimed at the wallets of Internet shoppers, gamblers and etailers. A separate bill in Congress would essentially end the sales tax exemption for Internet sales, which < a href="http://www.cio.com/article/591356">states and cities say costs them billions of dollars a year in lost revenue, but saves shoppers serious money.

Meanwhile, the recession-driven drive to tax the Web has also mobilized the giants of ecommerce and their allies in Congress. In an unusual show of bipartisanship, Virginia Democrat Rick Boucher and Texas Republican Lamar Smith have introduced the Digital Goods and Services Tax Fairness Act of 2010', which would make it extremely difficult for states to levy taxes on goods or services purchased over the Web.

One provision of the Boucher-Smith bill would force state legislatures to hold up or down votes every time a state agency attempted to tax anything sold via the Internet. If, for example, California's Board of Equalization decided to tax, say, digital music sales, an action the agency could now take without benefit of enabling legislation, the state legislature would have to pass a law specifically authorizing that measure.

That would, of course, politicize the process, and in the current anti-tax climate even lawmakers who think a tax on a particular item or service might be a good idea would be hard-pressed to vote for it and it could be vetoed by the governor.

Las Vegas in your living room

Four years ago, Congress banned online gambling sites in the U.S. and made it illegal to transfer cash to offshore digital casinos. That ban has worked about as well as Prohibition did.

Anyone with a bit of ingenuity can circumvent the prohibition on cash transfers, and online poker and other games are flourishing. Given that reality, and the need to raise revenue, a pair of bills to repeal the ban and allow the Internal Revenue Service to tax online gambling businesses are working their way through Congress. The bill would also allow the government to tax the winnings of individuals, in much the same way winnings at a race track are taxed today.

Supporters of the bill say it could raise as much as $42 billion over ten years.

With the mid-term elections just a few months away it's hard to handicap the chance of passage for any potentially controversial legislation. But the Internet Gambling Regulation, Consumer Protection and Enforcement Act was co-sponsored by 70 members of the House, including, Barney Frank (D.,Mass.) the influential chairman of the Financial Services Committee, and passed its initial hurdle in committee by a vote of 41-22, with members of both parties in support.

Web Sales Tax Free Ride Ending?

When I last wrote about the Web sales tax debate, there was no action planned at the federal level to end the exemption. That's changed. The Main Street Fairness Act, (PDF) introduced last month by Rep. Bill Delahunt (D-Mass.), would end it.

As I noted at the time, uncollected use taxes (a use tax is pretty much the equivalent of a sales tax) for the six-year period ending in 2012 will range from $52 billion to $56 billion nationally, according to a 2009 study by economists at the University of Tennessee. New York City alone will lose at least $390.6 million in 2012; Chicago $229 million, they predict.

If you've followed this debate at all, you've no doubt heard the argument that the crazy quilt of more than 8,500 taxing jurisdictions makes collecting taxes on Internet impractical. That's not the case.

I recently met with David Campbell, the CEO of a Seattle-based company called FedTax.net, that offers Internet merchants free tax calculation for any of the taxing jurisdictions in the nation. His company, with just 10 employees, is already feeding sales tax data to 23 states that are members of the Streamlined Sales Tax Project. If a company as small as Campbell's can figure this out, it's hard to believe that giants like Amazon and eBAY, couldn't do the same.

"The people who say it is too complicated to collect a sales tax are running the largest electronic marketplaces on the planet," says Campbell. "Of course it can be done."

But, it's obviously not in the interest of huge online retailers to admit that collecting the tax is feasible. Small business might be a different story, but they are exempted by Delahunt's bill.

San Francisco journalist Bill Snyder writes frequently about business and technology. He welcomes your comments and suggestions. Reach him at bill.snyder@sbcglobal.net.

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