World of e-commerce thrives with few rules- Idaho ranks 8th in convenience of shopping on Net

If Divit Cardoza wants to satisfy a desire for a specialty wine from a small
California winery, the Boise resident is perfectly free to make the purchase
online.

But if Cardoza, a wine buyer at the Boise Co-op, moved to Florida,
that purchase would be a felony.

Beyond wine, Idaho residents have more freedom to buy goods and
services through the Internet than most Americans. In a report issued
in March by a Washington D.C.-based organization, Idaho ranks
eighth in the nation for being consumer friendly for Internet
transactions.

Ironically, Idaho ranks far above states that are home to many of the
companies developing advanced Internet technologies, states such as
California and Texas.

That´s because those states are more highly regulated than Idaho,
being more restrictive about online purchases of home mortgages,
insurance and wine, according to the report by the Progressive Policy
Institute, an organization that promotes economic growth and
freedom.

With more consumers using the Internet and feeling more comfortable
about making purchases online, e-commerce will be a driving force of
the economy in the future, according to the Census Bureau.

College students can take courses online. Homeowners can get their
mortgages refinanced online. Airline tickets and hotels can be booked
online. Wine, music, stocks and even professional services can be
purchased online.

E-commerce retail sales grew by 13 percent in the last three months
of 2001, growing more than twice as fast as all retail sales in the
country, according to the Census Bureau. And e-commerce sales are
expected to reach $3.2 trillion by 2004.

Consumers like e-commerce because of the convenience and the fact
the Internet eliminates the middleman — like a local retail store.
Obviously, that can create concerns on a local front.

But Dale Peterson, executive director of Buy Idaho Inc., is
philosophical about area businesses facing global competition via the
Web.

“It´s a concern, but we´re not going to stop it,” said Peterson. “People
all over the world can sell into Idaho, but Idaho businesses can sell all
over the world. Who has the most to gain? We do.”

This “if-you-can´t-beat-´em-join-´em” attitude works because of a
confidence in the quality of Idaho goods, said Peterson. Buy Idaho
even has a Web site so that anyone, anywhere can do business via
the Internet with Buy Idaho business members.

Gary Mahn, director of the state Department of Commerce, agreed
that restrictions on Internet purchases would do more harm than good
to Idahoans.

“E-commerce is a way for business-to-business and for consumers to
do business,” said Mahn. “You can do electronic commerce and still
support Idaho businesses.”

While the state has no way of tracking how much Idaho residents
spent out-of-state through online purchases, it also doesn´t track how
much revenue comes into the state by Idaho businesses selling their
own products and services online. So there´s no real way to
determine the net gain or loss to the state.

Dan John, Idaho´s tax policy manager, isn´t alone in guessing there is
a significant loss from sales tax.

“We estimate the state loses up to $25 million a year in sales tax for
remote sales,” said John, explaining that remote sales cover
everything from purchases made over the Internet, over the phone or
through catalogues.

Consumers are supposed to pay sales tax for purchases made online,
but often don´t know that. Online businesses aren´t required to
charge tax for out-of-state sales, but the consumer is expected to use
the honor system in reporting such purchases on their annual income
tax form and pay the 5 percent state tax.

In 2000, the last full tax year reported, the state received $193,000 in
sales tax for those self-reporting remote sales, said John.

According to John´s figures, that means less than 1 percent of those
taxes were paid.

“That´s considered the biggest joke because no one does it,” said
Ryan DeLuca, CEO of Boise-based Bodybuilding.com, a company
that relies on its Internet sales for the vast majority of its revenues.

Bodybuilding.com is required to charge and pay sales tax for online
purchases that originate in Idaho, however. But since Idaho
consumers are a small percentage of his business, that is not an issue, said DeLuca. The loss
of sales tax revenue is a vast issue that won´t be solved soon.

“Every state that has a sales tax” requires consumers to pay remote taxes, said John. “But
that doesn´t mean there´s a simple matter of (implementing) it. This is a national issue — it´s
far from being an Idaho issue.”

Mahn said how Internet sales are taxed is a large issue.

“The tax policy needs to be consistent,” said Mahn. “With mail order, or Internet sales, local
businesses are at a 5 percent disadvantage. There´s got to be some way of doing this so
there´s not a disincentive for doing business on Main Street.”

For instance, Netflix.com, a California company that rents DVD movies through online
subscriptions, has nearly 1,000 regular customers in the Boise area, each paying an average
of $20 a month to receive movies through the mail. Not only is the monthly fee going out of
state, that also means those customers are spending less money with local retailers or movie
outlets, who in turn pay sales and corporate tax in Idaho.

On the flip side, Bodybuilding.com brings in large amounts of revenue to the state through
corporate taxes. “Ninety-five percent of our sales are done online,” said Bodybuilding.com´s
DeLuca, adding the company also has two retail outlets in Boise. “But we pay corporate taxes
here. So all that money comes in from out of state — and from other countries too — straight
into Idaho.”

Worldwide competition that lures local customers away is an irritant, but not a crisis, say local
merchants. Cardoza said wine customers at the Co-op find a wide selection and good prices
in the Treasure Valley and only resort to the Web to buy special wines.

“Consumers here can buy whatever they want here, and our prices are better than over the
Internet,” he said, adding that the Co-op also sells wine through the Internet. Idaho is one of
just 11 states that have no restrictions on selling or purchasing wine online. “I don´t find
(Internet sales) to have any major effect on our business,” he said. “If we can´t get you what
you want and you can get it somewhere else, then go ahead and get it.”

Home mortgage transactions over the Internet are also highly regulated by many states, which
require companies to have licenses in each state where transactions are conducted. Only
Alabama, Alaska, Colorado, Montana and Wyoming do not regulate mortgage brokers at all,
but 17 states require mortgage brokers to have a brick-and-mortar office in each state where
business is conducted. Idaho requires in-state licensing by online brokers but does not
require them to maintain offices here.

“There are a couple of large national lenders that target this area,” said Horace Hunt, a senior
loan officer for Idaho Banking Co. in Boise.

While Hunt finds that consumers usually prefer to get a mortgage from someone they can
meet face-to-face, he also said Idaho Banking Co. does online mortgages throughout the
state and in Oregon. “This is a relationship business,” he said. “Somebody doing this from
out-of-state is not going to have that relationship and the process can take longer.”

Hunt warns that consumers need to be aware of regulations brokers must follow when doing
an online mortgage. One customer came to him after spending weeks working with a broker
online, only to find the transaction couldn´t be legally completed because the out-of-state
broker wasn´t licensed in Idaho.

The Progressive Policy Institute report points out that regulations differ widely from state to
state when it comes to what consumers are allowed to buy online.

Many states have restrictions for buying contact lenses online and have different rules for
purchasing online prescriptions. Idaho, for instance, does not allow the electronic transmission
of prescriptions, making those online purchases more difficult.

While DeLuca finds Idaho a good state in which to conduct e-commerce, there is one
restriction that affects his business.

“We have a fat-burner product that contains ephedrine, and there are two states — Texas
and Idaho — where you can´t sell ephedrine,” he said. The company, however, has a
distribution center in Florida so it sells its ephedrine products from that site.

To offer story ideas or comments, contact Julie Howard
[email protected] or 373-6618

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