Leon Worden

Internet taxes and the state of the city

By Leon Worden
Friday, August 6, 1999

magine, if you will, a room packed with at least 300 people, mostly business people, and a member of the Santa Clarita City Council at the dais, telling them that retail sales over the Internet aren’t subject to sales tax.
    Now imagine I’m not making this up. Because I’m not.
    The occasion was the State of the City lunch last week, an “annual” affair held every three years or so.
    Why this particular City Council member was selected to speak for the city on the status of small business (hers died from neglect) and e-commerce (she’s against it) I’m not quite sure. But I actually felt a twinge of embarrassment for her, for a moment anyway— something I haven’t felt for anyone at City Hall in, oh, maybe a couple of weeks.
    Anyway. If you’re an Internet retailer, I’m sorry to say that no, despite the assertions of one of our City Council people, Santa Clarita is not some sort of magical tax-free zone. You still must pay sales tax, same as ever.
    (Memo to City Council: Consult city attorney before making speeches on business.)
    For the record, when a company with a physical presence in California makes a sale to someone in California, whether in person, by fax, by snail mail or with the click of a mouse, the transaction is subject to sales tax.
    Conversely, if a California company makes a sale to someone in another state, the transaction is not subject to the California sales tax. That’s the case whether you’re talking about an Internet business, a catalog sales business, or some guy with a shop in Saugus, Calif., who fills a phone order for someone in Saugus, Mass.
    The sales tax in Los Angeles County is 8 1/4 percent. If a merchant in Santa Clarita sells (by Internet or otherwise) a $1 item in Los Angeles County, the buyer pays $1.0825. Of that, 6 cents go to the state, 1 cent goes to the city of Santa Clarita, 1 cent goes to county transportation agencies, and 1/4 cent goes to the county.
    If a merchant in Santa Clarita sells (by Internet or otherwise) a $1 item and the point of sale is outside Los Angeles County but still in California, the buyer pays $1.0725. Of that, 6 cents go to the state, 1 cent goes to the city of Santa Clarita, and 1/4 cent goes to the county. (County transportation agencies don’t get their surcharge.)
    Either way, the city of Santa Clarita gets its full share of the sales tax, as long as the end customer is in California.
    I think what confused this particular council member was the Internet Tax Freedom Act, which Congress and the president folded into last year’s omnibus budget package. The act prohibits multiple taxation of a single retail sales transaction by multiple cities and states. It does not exempt Internet vendors from any tax that any non-Internet company must pay— including sales taxes at the point of origin.
    I’ll rephrase that. An Internet vendor based in Santa Clarita still must collect sales tax on transactions completed in California, just like any brick-and-mortar business or catalog sales operation.
    The act was needed, Congress and the president said, to stop cities and states from subjecting Internet businesses to “special and discriminatory” taxes, above and beyond the off-line equivalent. For transactions with no off-line equivalent, such as dial-up access and web hosting, the act prohibits new taxes for three years.
    The act, in its final form, was endorsed by organizations representing the nation’s states and cities, including the National League of Cities, in part because it created a temporary commission to study Internet taxation.
    Meeting for the first time a month and a half ago, members of the Advisory Committee on Electronic Commerce called for tax “neutrality” and expressed an interest in standardizing state and local tax collection methods.
    “I don’t think it’s feasible over the long term to tax one form of commerce differently than the other,” said John Sidgmore, vice president of MCI and a commission member. “Massive changes are going to be required to the current state and local framework... but there are ways to get through (this).”
    E-commerce, our Santa Clarita council person said last week, was killing local small business and sucking sales tax revenues out of our fair city. Every patriotic Santa Claritan, she said, should turn off the computer and go shopping locally, in person. Better not make it Wal-Mart, either.
    Now, you might think it’s cute or amusing to have country bumpkin council members who run around telling consumers to change their shopping habits (as if). In truth, it is neither cute nor amusing. It’s ludicrous— as ludicrous as telling people our traffic problems will be solved if they’ll all ride Metrolink.
    If sales tax revenue is important to our city tax collectors— it is— and if the Internet is drawing business away from local retailers— it is starting to— then, obviously, our city needs to do two things: Actively recruit Internet vendors to base their operations inside city limits, so the city can collect the sales tax; and help Santa Clarita retailers and other local businesses develop a profitable Internet presence, so they can compete with businesses elsewhere that provide similar goods and services online.
    Rather than chortling that the sky is falling, our governmental leaders should be seizing the opportunity to nurture entrepreneurial businesses for the benefit of Santa Clarita’s bottom line. That is the economic state the city should be in.
    Leon Worden is The Signal's business editor.

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