Michael Wolf found the Internet a great place to do business — so much so that he completely abandoned the traditional auction model and moved his entire operation online.
“It’s leveled the playing field between us and our competitors,” says Wolf, owner of Internet auction house Ewolfs.com.
The result? Wolf’s customer base increases 20 percent with every auction. And while that type of tangible business boost is attractive, other factors, such as Internet taxation, have many business owners wondering just what the future of e-commerce will be.
“The Internet shouldn’t be an excuse to turn all of our existing rules and regulations upside down,” Wolf says.
For businesses such as Wolf’s, the Internet has provided a virtual head start in the fledgling marketplace and thousands of traditional brick-and-mortar companies have eagerly embraced the Internet revolution. They’ve launched Web sites and peddled their wares to anyone with a computer and a credit card.
This new click-and-mortar model — a combination of physical locations and cyberstores — hasn’t gone unnoticed by taxing authorities, who have raised questions about the need to tax goods and services sold online.
But for Wolf, there’s little concern about potential online taxes. The auction trade isn’t a commodity business and bidders aren’t likely to let a tax of a few percent stop them from buying the items they seek. Even if it did, Wolf says he would never know.
“At some point, they stop bidding,” he says.
There are thousands of taxing jurisdictions, and the rules are not even uniform within the same state, explains Patrick Carney, a tax partner with the Pittsburgh office of Ernst & Young.
“That makes it very difficult. The market seems to be working itself through some of this already. We can conjecture about it, but the states aren’t going to wait for (Congress).”
According to Carney, two states have already moved on the issue. California has drafted a bill that makes no distinction between companies with stores in every state and their dot-com operations. These businesses must tax their Internet sales.
North Carolina has taken a different approach, placing the burden on the consumer. State officials integrated a line item into the state’s tax return which requires taxpayers to report use taxes.
Explains Carney, “You’re not only signing off that your income is true, but also that you’ve correctly assessed yourself the use tax on items that you’ve bought from an auction house or from Land’s End or whomever and remitted it to the state.”
Consider it a trust-based approach.
“I think that’s something we’re going to see more of,” Carney says. “Other states are talking about doing the same thing. That would, in effect, solve the problem by making it legally the consumer’s responsibility to self assess the tax.”
But business owners aren’t waiting for the states to enact legislation. Many are taking the initiative themselves.
“A lot of my clients that have formed dot-com companies have brick-and-mortar locations in a number of different states (and are) already are charging sales and use tax,” Carney says. “The rub comes from those companies like Land’s End that only have a couple of physical locations, so they don’t have to charge tax in a lot of different jurisdictions.
“The brick-and-mortar stores that already have dot-com companies are following this draft bill that’s been put out by California. That revenue drain the states are talking about, I’m not sure it is really there. In fact, we think it’s very exaggerated.”
The issue, though, is so hot that presidential candidates are chiming in with their thoughts. And though Congress is expected to take up e-taxes again later this month, Carney prefers that Congress keep its legislative pens away from it.
“I think the laws as they currently are make a lot of sense and they work,” he says.
“I’m not as concerned about the uneven playing field because the market has a way of taking care of itself.”
How to reach: ewolfs.com, (216) 575-9653 or www.ewolfs.com; Ernst & Young Pittsburgh office, (412) 644-7829
Daniel G. Jacobs ([email protected]) is senior editor of SBN.