He is a regular contributing columnist to The REAL ESTATE PROFESSIONAL

E-commerce is a big deal, but retail purchases made on the Internet are not subject to sales taxes, a matter which should concern the real estate community.

As a consumer you can buy a shirt, CD or software online, but unlike a local purchase there is no sales tax, no driving around (or polluting) and no parking hassles. The sales tax you don't pay is a savings, and so is the money not spent on gasoline or lost through vehicular depreciation. 

Given that people detest taxes and that at this moment online sales are untaxed, it may seem as though all is right with the world of online retailing. But a closer look at the Web raises a question: Is online shopping too good? Will the Internet kill off local stores and the demand they generate for commercial property? And if we lose local stores, what about the people they employ and the homes those employees buy and rent?

Under the so-called "Internet Tax Freedom Act" there is a three-year ban on Internet taxes, a ban scheduled to expire in October, 2000. What changes then, if anything, is uncertain.

The law creates an "Advisory Commission on Electronic Commerce" which is supposed to provide a report by April, 2000 suggesting tax options to Congress. Based on impartial and unbiased commission findings, Congress is then supposed to adopt a reasoned tax policy to address the trillion-dollar economy now emerging online.

All of this sounds good in theory, but in practice the commission has not generated much respect.

As an example, in March the (http://www.usmayors.org) U.S. Conference of Mayors and the (http://www.naco.org) National Association of Counties went to court in an effort to stop the Commission from even meeting, the contention being that its membership included an excess number of communication industry representatives.

To make matters worse, the Commission was actually housed for several weeks in office space made available through the (http://www.eia.org) Electronic Industries Alliance, a group that claims to represent "80% of the $550 billion U.S. electronics industry." 

THE REAL ISSUE IN ALL OF THIS IS MONEY

(http://www.ey.com/ecommerce/sky.asp) An Ernst & Young study found that in 1998 just $2.3 billion in online sales were likely to face state-level retail taxes, and that states have lost a mere $170 million in tax revenues. Lost taxes, said the study, amounted to "only one-tenth of one percent (0.1 percent) of total state and local government sales and use tax collections."

The reason for the $2.3 billion taxable sales figure -- an astonishingly-low number -- is that most online commerce is not taxable. The study, funded by the eCommerce Coalition, "a broad-based national coalition dedicated to providing sound policy information on the taxation of electronic commerce" points out that states do not tax business-to-business sales; intangible services such as brokerage; and the sale of often-exempt products such as groceries and prescription drugs.

Even so, the $2.3 billion figure is surely debatable. As an example, (http://www.washingtonpost.com) The Washington Post reports that "consumers spent about $8 billion buying computers, books, CDs, clothing and other items on the Internet last year." (See: "Internet's E-conomy Gets Real," June 20, 1999)

But what happened in 1998 means little. In the future online sales will be substantially larger and thus tax revenues will be a significantly greater issue. (http://www.jup.com) Jupiter Communications says that consumer sales online just in November and December of this year will total $6 billion, while worldwide e-commerce will top $1 trillion by 2003 according to both (http://www.activmedia.com)ActivMedia and (http://www.forrester.com) Forrester Research.

WHAT DOES ALL THIS MEAN TO THE REAL ESTATE INDUSTRY?

Think about the movement of industrial jobs from high-cost areas (say the Rust Belt states) to low-cost locations overseas. As jobs moved away, incomes declined, home values stagnated or fell, and commercial space was tough to lease,

In a similar sense, the Internet has the power to move retail sales to new locations. Buying small stuff locally is not an issue, but with big-ticket items (think of computers, watches, and software, as examples) consumers may be able to obtain real savings by buying online and without a sales tax.

Think it can't happen? Consider this: over a two-year period (http://www.egghead.com) Egghead -- which is now entirely online -- closed 150 brick-and-mortar locations.

For the moment, the Advisory Commission is likely to be guided by the Supreme Court's 1992 (http://caselaw.findlaw.com/cgibin/getcase.pl?court=US&vol=504&invol=298) Quill decision, a ruling which said that states cannot tax sales by mail order firms and telemarketers unless those companies are physically located in the taxing jurisdiction.

The catch, of course, is that one can easily locate an Internet firm in a jurisdiction without a retail sales tax -- five states would now qualify -- or in states with low overall costs. And the sure result will be fewer retailers and declining commercial property values elsewhere.

Alternatively, if there is an Internet tax, there will also be lots of forms, rules, and enforcers. A legitimate marketplace -- the Internet -- will be devalued.

It will be interesting to see what the Commission suggests and what Congress decides. In the end, it's likely that online taxes are both inevitable and likely to be delayed for years as a result of court suits challenging whatever the Commission proposes as well as whatever Congress enacts. By the time an online tax plan is in place, I expect it will be largely irrelevant because by then many online retailers will be firmly situated in tax-free locations.