CommunicationsWeek International: On-line gambling technology good bet for e-tax collection

Verification technology used in on-line gambling in the United States may help to resolve the problem of how to tax on-line transactions.

The creators of a technology for preventing on-line gambling fraud are planning to extend their system to the Internet. If successful, the technology, which verifies the geographical location of a user, could aid the collection of sales taxes on cross-border e-commerce transactions.

The Remote Access Verification Environment (RAVE), built by KPMG Peat Marwick LLP and Bally Gaming and Systems, Las Vegas, is being used to verify that consumers placing bets on live sporting events over a PC-based-modem-to-modem link are located within the state of Nevada, and so are legally permitted to do so.

Las Vegas casinos provide their customers with proprietary client software, a dialer and a smart-card device that slots into a PC's floppy-disk drive. RAVE then combines the punter's sign-on account information with carriers' switching, SS7 and billing data to confirm that the dial-up call originated within state boundaries-and was not passed via call forwarding, conferencing, PBX or proxy server.

Telcordia Technologies Inc., Morristown, New Jersey conducted a survey of every switch owned by every telecoms operator in Nevada, and Rally said that all but the most antiquated exchanges will support its system.

Bally has submitted patents for the RAVE architecture and is now developing its client software in-house to perform the same location verification task over the open Internet. Each time a consumer uses the dialer, the client application will send the ISP's local number to the server. This number, together with information supplied separately by the user about their local phone service, should allow the system to pinpoint the consumer's location and so let the e-commerce vendor apply the appropriate sales tax.

"We're definitely going to do it," said Tony Fontaine, vice president of applied technology for Bally. "There are a lot more markets out there than gambling."

However, one of the fundamental questions facing the Advisory commission on Electronic commerce (ACEC), which is due to present recommendations on taxation to the U.S. Congress in April 2000, is where to locate an individual transaction for tax purposes.

The European Union (EU) and the Organization for Economic Cooperation and Development will be putting their views to an ACEC meeting in New York this week. The EU would like Internet taxation to relate to Value Added Tax, which is levied by individual member states, while the OECD is concerned that developing nations could see a flow of revenues Out of the country if a system based on the location of the retailer is adopted.

International Data corp (IDC) of Mountain View, California, predicts Internet-based commerce will reach a "staggering" $1 trillion by 2003, with just over half this figure generated from within the United States. The potential for new tax revenues, and for the redistribution of revenues currently levied on offline retail outlets, could be equally staggering, but a globally agreed approach to taxation is still some way off.

Lack of enthusiasm

There hasn't been a lot of enthusiasm for taxing the Internet, while everyone in Washington has been taking credit for the success of the Net," said Barry Parr, director of consumer Internet research at IDc. "That honeymoon is over. If the Internet is to become a serious part of the economy people will have to pay their taxes."

The United States has a threeyear moratorium on Internet sales tax, but the formation of a coherent domestic and international policy has been hampered by conflicting interests and the complexities of its existing system. U.S. sales tax is set not just by states but by individual counties within states, and rural states oppose changes to this system if it means loss of vital tax revenues.

If RAVE, or similar verification technology, is successfully extended to the Internet, it could help regulators rationalize a national tax policy for e-commerce by automating a complex process.

But the use of tracking technology to monitor legal transactions--as opposed to preventing fraud--could raise serious privacy concerns.

"The number one barrier to people making purchases on-line is concern about privacy and security," said Rich Prem, tax partner at Deloitte and Touche, San Francisco.

Most e-commerce purchases involve shifting physical products to a delivery address that could provide an alternative taxation point. But Prem points out that some states theoretically also tax downloadable applications, and some might even extend tax to on-line electronic games.

"E-commerce could create a whole new set of winners and losers," acknowledged ACEC member, Stan Sokul. However, Sokul maintains that some politicians are adopting "a protectionist attitude" in public while privately seeing e-commerce as "a cash cow" for their states in the longer term.

The commission is split into two camps, said Prem. While some commissioners would like to see a permanent moratorium on Internet taxes for most types of transaction, another group favors a new, simplified national tax regime based on retailer location--a level playing field for on-line and store-based businesses. This would involve the reversal of existing legislation that enforces sales tax on mail order purchases payable to the consumer's home state, even though few consumers are aware of this obligation.

The U.S. sales tax system is notoriously complex, in fact "a mess" said Prem. "To go forward there has to be some radical reform." But the danger for ACEC is that a "sovereignty" issue would quickly arise between the states and federal government if the commission tried to recommend less state control over tax rates.

Meanwhile, the Singapore and Irish governments are among those capitalizing on the uncertainty in U.S. and European policy by tempting e-commerce vendors from around the globe with tax-free incentives and high-bandwidth infrastructure.

Ultimately, only the "sheer volume" of e-commerce transactions is likely to force congress to take a radical stance, Prem said. "The question is, do we have to get to the position where states can't put police and firemen on the streets or will congress act now?