Debate Over Internet Tax Policy Intensifies

A study, released by the National Association of Counties and the U.S. Conference of Mayors on the eve of a two-day meeting of the Advisory Commission on Electronic Commerce (ACEC), found that 58 percent of respondents specifically support sales tax collections on purchases made over the Internet.

Additionally, 80 percent responded affirmatively when asked if “all retailers that do business in your community should collect sales tax.”

“It is clear that most Americans get the connection. Intelligent taxpayers realize that local and state governments must collect sales taxes to provide services such as education, water and sewer, trash pickup, traffic control, roads and bridges, and provide salaries to police and firefighters. Without sales taxes, these services just don’t exist,” said C. Vernon Gray, NACo president and chairman of the Howard County (Md.) Council.

Conducted in late November, the random phone survey of 1,000 Americans was released to coincide with the opening of the ACEC meeting in San Francisco Tuesday.The 19-member panel, composed of business leaders, state and local government representatives and federal officials, is to recommend an Internet sales tax policy to Congress by April 2000.

During the meeting the panel will discuss 14 different Internet tax policy proposals that range from making e-commerce completely tax free to streamlining state sales taxes into a uniform system that would simplify collection.

Another survey timed to coincide with the meeting tells quite a different story. It says that 60 percent of 17,000 online shoppers polled would make fewer online purchases if they had to pay sales taxes. The unscientific survey, conducted by the e-commerce site BizRate.com, also reported that 40 percent of respondents have never paid sales taxes on online purchases.

In the days leading up to the pivotal third meeting of the ACEC, all sides of the Internet tax debate are embarking on media blitzes to publicize their positions on the issue. No fewer than six groups are planning news conferences the morning the meetings begin.

The divisions between those urging that sales taxes be applied equally to Internet commerce and normal retail sales and those who wish to create a completely tax free Internet have widened. And the split is now crossing political lines.

The leading advocate of applying a simplified sales tax system to the Internet is Utah’s Republican Governor Mike Leavitt. Fellow Republican and Virginia Governor Jim Gilmore has advanced the most sweeping anti-tax proposal.

Democratic U.S. Sen. Ron Wyden of Oregon has teamed with Republican U.S. Sen. John McCain of Arizona to sponsor federal legislation banning tax collections on Internet sales. Both Phil Gramm and Kay Bailey Hutchison, Texas’ Republican Senators, on Friday called a tax-free Internet unfair to traditional retailers.

The debate centers on the explosive growth in the online economy, which is expected to generate $100 billion in sales this year and $1 trillion by 2002.

State leaders claim that by 2002 they will lose approximately $10 billion in annual revenue to uncollected sales and use taxes. New Jersey officials announced Monday that they are already losing $21 million annually on Internet purchases.

Tax opponents argue that taxing Internet commerce would stifle the very force behind the economic boom.

The Internet Tax Freedom Act of 1998, which created the ACEC, established a three-year moratorium on the addition of any “new” taxes on the Internet. It does not prohibit states from enforcing laws already on the books.

“Whether shopping online or shopping at Sears, Americans realize that many of their community’s established retailers are unfairly disadvantaged because they are collecting sales taxes while their dazzling cyber competitors are not,” said Denver Mayor Wellington Webb.

Commission members have begun to make their positions on the Internet tax issue known as the group’s deadline approaches. Leavitt, Dallas Mayor Ron Kirk, and National Conference of Commissioners on Uniform State Laws president Gene LeBrun have indicated their support for applying current sales taxes to Internet purchases.

Gilmore, Americans for Tax Reform President Grover Norquist, California Board of Equalization chairman Dean Andal and Association for Interactive Media consultant Stanley Sokul support various versions of tax-free proposals.

“E-commerce is a driving force of our economy and we should not saddle it with new taxes,” Gilmore said.

On Friday, the Clinton administration said that the Gilmore tax-free plan “raises troubling questions” and wondered whether it would provide “an incentive for merchants to establish a kiosk in every store so that consumers can make all their purchases online and avoid paying sales taxes.”

Many retailers have already taken steps tantamount to doing just that. Barnes & Noble, for example, has established its online operations as separate entities so that its physical stores won’t create the “physical presence” required by the Supreme Court as jurisdiction for taxation.

The ACEC must have a two-thirds majority to adopt any policy recommendation. If consensus is not achieved — an outcome that now seems likely — the issue would revert to Congress.

“If there is a stalemate on this commission, and that possibility is increasingly likely, it would go right back to Congress. You will undoubtedly have people there asking for an extension of the moratorium,” said Iris Lav, Deputy Director of the Center on Budget and Policy Priorities.