Stateline Story

Internet Panel Far Apart On E-Sales Taxation

Created by the Internet Tax Freedom Act of 1998, the ACEC is tasked with making an Internet taxation policy recommendation to Congress by April 21, 2000.

"The point we're getting to here is that we've pretty much reached a consensus on the matters of international tariffs and access taxes. But we are far from agreement on the issues of sales taxes. I would say that you don't kill the goose that lays the golden egg, but that is up to us to decide as a commission," said Virginia Gov. Jim Gilmore, who chairs the commission.

The panel voted on Wednesday to table two resolutions offered by commission member Grover Norquist, who heads the conservative lobbying group Americans for Tax Reform, even though his proposals enjoyed wide support. The resolutions recommended outlawing Internet access taxes and repealing the 3 percent federal excise tax on telecommunications.

Three commissioners representing the Clinton Administration signaled the federal government's opposition to scrapping the federal excise tax.

"The Administration does feel this is an important revenue source, bringing in about $4 billion this year and a projected $52 billion over 10 years. We are operating in an era of fiscal responsibility and if we are going to recommend doing away with $4 billion in revenue, it will have to be paid for somehow," said commissioner Joseph Guttentag.As expected, the San Francisco meetings were marked by sometimes rancorous debate over the right of states and localities to collect sales taxes on Internet commerce. According to state and local officials, they stand to lose as much as $10 billion in sales tax revenue by 2003.

The main target of criticism was a proposal made by South Dakota Governor Bill Janklow on behalf of the National Governors' Association, the National Conference of State Legislatures and other organizations representing state and local governments.

It would have states enter into contract with a "trusted third party" to calculate, collect and remit sales taxes to each state and locality to which goods or services are delivered.

"The fundamental problem of a technological approach is a uniform tax base. I don't disagree with South Dakota taxing South Dakota residents, but I do have a problem with forcing California residents to collect taxes on sales to another state," said commission member Dean Andal, president of the California Board of Equalization.

Criticism of the state taxation plan also focused on who would pay for the technology needed to bring all retailers into compliance with the proposed system.

"Your proposal calls for a third party vendor to which every mom and pop store will have to be made compatible. Under my no-tax proposal, mom and pop stores for the first time will be able to compete with the big boys. Under your proposal, who is going to pay for that?" asked Virginia Governor Jim Gilmore.

Janklow said each individual state would pay for each company that wishes to adopt the system. The states, he said, would gladly trade that cost for the ability to collect lost sales tax revenue.

"E-commerce today is a midget compared to what it will be three, five or 10 years from now. We cannot adopt a tax policy that assists in wiping out small town main street merchants," he said.

Debate grew heated after the South Dakota governor made the facetious remark that a voluntary tax system is better than "me ordering the state police to stop and inspect every one of those big brown UPS trucks that comes into my state so that we can collect sales and use taxes."

His comments were immediately attacked by commissioner Norquist.

"I am hoping that your comment about regulating interstate commerce was a joke. I think that Congress would be interested in becoming involved if 50 states suddenly enacted barriers between each state and I seriously doubt that's legal," Norquist said.

Gilmore was at odds with his fellow state and local officials on the commission on the taxation issue. He would eliminates all taxes on Internet sales of goods, services and information, and compensate states for lost revenue with more than $1.7 billion annually in federal tax revenues.

Dallas Mayor Ron Kirk led the charge against making the Internet tax-free, arguing that bricks and mortar retailers would be at a severe disadvantage if their online competitors remain essentially tax-free.

"If you have are faced with two lines, and a sign on one line says 'pay taxes here' and a sign on the other line says 'tax free,' in the words of my seven-year-old, 'Duh,' " Kirk said. "We all love the Internet. We do not want to stifle its growth. But how are traditional stores supposed to compete and how are states and cities supposed to make up this lost revenue?"

Gateway CEO and commission member Ted Waitt offered a real world example that removing sales taxes from remote commerce offers consumers an incentive to shop more online.

"We as a company have analyzed our physical nexus requirements and have stopped collecting sales taxes in certain markets where that is not now required. In those areas where we no longer collect taxes, telephone sales have increased by 5 percent and Internet sales by at least double that," Waitt said.

For the first time, the panel heard testimony on adapting current tax collection technology to the Internet. According to Daniel Sullivan of Taxware International, that goal could be reached with little or no trouble.

"Looking at the panel, I see at least 5 commissioners whose businesses already use our tax collection software systems. It is Internet ready for e-commerce reports and could be easily managed from a remote location on a transaction tax server," Sullivan said.

Panel members admitted that while consensus on certain issues is near, agreement on the central issue of collecting sales taxes on Internet commerce might never be reached.

"It is possible that we can fail and not get to an agreement. Maybe that solution is an extension of the moratorium, maybe it's a streamlined collections system or maybe it is not collecting taxes at all. I'm not sure we have in any of these proposals any iteration of the final proposal," Utah Governor Mike Leavitt said.

Any recommendations to Congress must be approved by a two-thirds majority of the 19-member commission. The panel will meet for a final time in Dallas on March 20-21.