Internet Tax Panel To Start Work Next Month

WASHINGTON – Ending a six-month dispute over the composition of a congressionally created Advisory Commission on Electronic Commerce, Senate Majority Leader Trent Lott has named an Oregon county commissioner to fill a spot voluntarily vacated by Netscape CEO James Barksdale. This will allow the panel to schedule its first discussions toward forming the nation’s Internet taxation policy. 

Delna Jones, a commissioner in Oregon’s Washington County, joins Virginia Governor James Gilmore, Washington Governor Gary Locke, Utah Governor Mike Leavitt, Dallas Mayor Ron Kirk, Virginia Assembly Delegate Paul Harris, California Board of Equalization member Dean Andel, and former South Dakota legislator Gene LeBrun in representing state and local government.

Jones’s appointment balanced the number of government and industry representatives on the panel, which was originally scheduled to begin work last December, and led the National Association of Counties and U.S. Conference of Mayors to drop a lawsuit blocking the commission from meeting.

Industry representatives are America Online president Robert Pittman, Time-Warner president Richard Parsons, Gateway CEO Ted Waite, AT&T CEO Mike Armstrong, Association for Interactive Media counsel Stan Sokul, MCI WorldCom vice chairman John Sidgmore, Charles Schwab CEO David Pottruck, and Americans For Tax Reform president Grover Norquist.

The commission’s purpose is to recommend by next year a federal, state and local policy for taxing Internet sales.

Created by the Internet Tax Freedom Act of 1998, the nineteen-member commission is made up of eight state and local government representatives, eight business and consumer representatives and one representative each from the Commerce and Treasury Departments and U.S. Trade Representative’s Office.

The seven associations representing state and local governments lodged legislative and legal actions to prevent any work by the commission after 10 business leaders and only six state government representatives were included in its original makeup.

“The issues surrounding the Internet are too important to let the commission’s business be delayed any longer and [Mr. Barksdale] has graciously decided to step aside so the commission can proceed,” Lott said.

With the threat of litigation ended, the commission has scheduled its first meeting for June 21 in Williamsburg, Virginia. Gilmore is expected to be named chairman of the panel, which must now confront an issue of great concern to the states and their revenue systems.

There are two tax issues facing the statesInternet access charges and collection of sales taxes on Internet commerce. Under the Internet Freedom Act, states with access taxes prior to October 1998 can continue to collect them, but all other states face a three-year moratorium on new taxes.

Thirteen states are covered by the grandfather clause: Connecticut, Hawaii, Iowa, Montana, New Hampshire, New Mexico, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas and Wisconsin.

While access taxes are of concern to the states, it is their inability to collect sales taxes on online transactions that has state revenue officials worried.

It isn’t hard to understand their concern. According to the U.S. Census Bureau, sales taxes make up 48.7% of state tax revenue. Total U.S. Internet sales approached $8 billion last year, with $3.2 billion of that coming during the Christmas seasonmore than tripling the previous year’s holiday sales.

In conventional transactions, a buyer is required to pay sales taxes on goods, but a seller isn’t required to collect the tax unless the business has a corporate office, warehouse or other physical presence in the state where the sale occurs. The same laws apply to the $48 billion catalog retail business, and states have fought unsuccessfully for years to overturn them.

Put simply, the legal issue is how to tax purchases that not only cross state lines, but are completed over the borderless Internet.

Nevada has a particular cause for concern. With no personal income tax, the state relies heavily on its 6.5% sales tax for revenue.

Michael A. Pitlock, director of Nevada’s Department of Taxation, points out that if a Nevada resident buys a $3,000 computer over the Internet instead of from a Nevada retail outlet, the state loses $195 it otherwise would have collected.

“Looking at the national numbers, Internet commerce is now a significant concern,” Pitlock said. “We need to put a requirement on vendors to collect taxes for all products they ship to each state.”

Few e-commerce companies are likely to heed that plea. Most agree with a disclaimer once listed on the CDnow.com Web site: “Consumers are to pay and report their own sales taxes in their respective states. We have no control over this reporting.”

State governments responded to increased mail-order sales by imposing a “use” tax, so called because consumers used their purchases in the state, on people who bought items through catalogs. Although virtually nobody pays such a tax and almost no states enforce it, consumers are supposed to voluntarily pay the equivalent of sales taxes on out-of-state purchases.

“It’s like putting a speed limit sign on the road that says, ‘By the way, police don’t patrol here and they never will,'” Pitlock said.

University of Chicago economist Austan Goolsbee found in a recent paper that applying sales taxes to Internet commerce would reduce the number of online buyers by 25% and depress total spending by more than 30%. Goolsbee based his figures on an analysis of the buying decisions of 25,000 Internet shoppers.

According to Neal Osten, an Internet policy specialist with the National Association of State Legislatures (NCSL), e-commerce industry leaders have indicated a willingness to deal with one sales tax rate per state rather than the myriad state and local rates.

“The industry says it is tough for them to keep up with all the tax changes enacted over the course of a year in all the states,” Osten said. “Most state tax laws need to be rewritten to address telecom and Internet commerce. They need to be written in a way that allows for collection of taxes but does not burden or stifle industry.”

NCSL has convened an Internet taxation task force of its own, hoping to give state legislators a broader voice within the debate. The task force met April 7 and 8 in Jacksonville, Florida, and plans another meeting for the end of May to discuss strategies in advance of the national commission’s first meeting.

At least one member of the NCSL task force, Virginia Delegate Paul Harris, is also a member of the national commission.