Governors To Congress: Let Us Tax Internet Sales

More than 40 governors are calling for congressional approval of state sales taxes on Internet purchases.

In a letter sent to all House and Senate members late last Friday (8/17), the governors urge Congress not to renew a 1998 moratorium on Internet access taxes unless the states are allowed to design a system for the collection of Internet sales taxes.

“If you care about a level playing field for Main Street retail businesses and local control of states, local governments, and schools, extend the moratorium on taxing Internet access ONLY with authorization for the states to streamline and simplify the existing sales tax system,” says the letter signed by 42 governors. “To do otherwise perpetuates a fundamental inequity and ignores a growing problem.”

Most governors favor continuing the moratorium on access taxes and other Internet-specific taxes, which is set to expire Oct. 21, says Utah Gov. Mike Leavitt. But they are tying their endorsement of the moratorium to congressional action on sales taxes — the governors want the ability to apply existing state and local sales taxes to Internet purchases.

Should access to the Internet or the Internet itself be taxed? Leavitt says no. But Leavitt does think the states should be able to tax Internet transactions if they so choose.

At present, Internet sales tax collections are hamstrung by a 1992 Supreme Court ruling that limits the states’ ability to collect taxes from out-of-state vendors. Collection efforts are further complicated by the over 7,500 different state and local tax jurisdictions that render Internet sales tax collection a bureaucratic nightmare. Simplification efforts are underway in over three dozen states.

Estimates vary widely, but one study says states could lose upwards of $14 billion by 2004 should they not be allowed to collect taxes on Internet sales. Nearly 50 percent of total state revenue comes from sales taxes. Florida, Nevada, South Dakota, Tennessee and Washington depend on sales taxes for well over half their revenue.

Leavitt says basic fairness is at stake.

“This ultimately is an issue about whether it would be in the best interest of the country to create a permanent special privilege for consumers and businesses who buy and sell goods over the Internet, or whether we should create a level playing field that treats all buyers and sellers the same,” he says.

Critics say sales taxes would further squelch an already struggling industry. They note also that shipping and handling surcharges on Internet purchases give brick-and-mortar businesses plenty of room to compete.

The governors of California, Massachusetts and Virginia are among the eight who did not sign the letter. Their states are linked in their dependence on Internet and other hi-tech industries for economic growth.