The Channel and TaxationBy Pedro Pereira | Posted 2008-06-17 Email Print
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A new New York tax law and a proposal in California may have an impact on channel business.New York and California are looking to ease budget woes by sniffing around the Internet for increased tax revenue.
Not surprisingly, both states face stiff resistance. Little else riles Americans more than tax-increase proposals.
In New York, legislation went into effect this month requiring big Internet retailers such as Amazon and Overstock to charge tax for purchases from New York residents. Both retailers are suing the state.
Though the situations are different in New York and California, both have the potential to affect the channel.
The California proposal’s potential effect is clear. Taxing IT services would force solution providers to collect taxes on a number of services they deliver to customers. Whether all or only some services would qualify for taxation is one of the issues the legislation would have to address.
In Maryland, a law imposing taxes on IT services was repealed in April before it even went into effect. Opponents said the law was poorly defined and bound to cause serious headaches.
But aside from the difficulty of defining services for the purpose of taxation, does such a proposal have merit? As the United States economy becomes more and more service-based, an argument can be made for a sales tax on services. But singling out a specific industry and failing to define exactly what will be taxed is not the way to go.
The measure to tax software downloads would seem more defensible, as have been proposals to tax music, video and book downloads.
But things get complicated when you take into account the remote delivery of services. As solution providers check on network performance, deliver patches and handle data backups remotely, customers in California might be persuaded to deal with an out-of-state provider to save on the tax. That means local providers would lose out.
A version of this problem is what has happened with Web-based commerce since the Internet became a viable medium for buying and selling stuff.
This is why the new Internet tax law in New York doesn’t exactly distress local business owners who have to compete with no-tax commerce over the Internet. On the surface, the New York law would appear to level the playing field between brick-and-mortar local businesses and Internet-based stores.
Solution providers are well acquainted with the disadvantages of selling against Internet-based competitors that easily undercut them on price. In addition to often being able to sell a piece of hardware or software application cheaper, Internet stores also have the advantage of not charging tax in most cases.
They charge tax only when a buyer resides in a state where the Internet store has a physical presence. And that’s the problem with the New York law, which requires sellers to charge tax to all New York residents even if the seller doesn’t have a physical presence in the state. Opponents view this as "taxation without representation," an argument Overstock and Amazon are sure to make in their lawsuits against the state.
The fate of the New York Internet tax is now in the hands of the courts, so it could be a few years before we see a decision.
The California proposal may go nowhere, but don’t count on it. If you oppose it, you’d better get informed about it and work with other opponents to fight it.
Pedro Pereira is editor of eWEEK Strategic Partner and a contributing editor for The Channel Insider. He is at email@example.com.