Lowtax Special Report: US Internet Tax Debate Heats Up

Tax-news.com

10 February 2000

New legislation proposing a permanent ban new Internet taxes has been put before the US Congress.

Capitalising on the media hype over Senator John McCain's 'no net taxes' stance during the recent New Hampshire presidential primary debates, two Washington lawmakers have seized the opportunity to put their Internet Tax Freedom Act back into the spotlight.

The new bill, now renamed the "Internet Non-Discrimination Act", was tabled last week by its Republicans sponsors Congressman Christopher Cox and Senator Ron Wyden, just one day after a lengthy and spirited debate on internet taxes at a Senate committee hearing last Wednesday. Cox and Wyden were also the sponsors the Internet Tax Freedom Act 1998 which resulted in the current ban and established the Advisory Commission on Electronic Commerce (ACEC).

The new Cox-Wyden bill would make permanent the current 3-year moratorium on new "multiple" or "discriminatory" taxes on the Internet, which is due to expire in October 2001.

In statements issued last week, Cox and Wyden were unapologetic about their enthusiasm for making the Internet tax ban permanent.

"You can't squeeze the new economy into policies written for smokestack industries," Wyden said. "With our Internet Tax Freedom Act, Chris Cox and I put a temporary stop to the reckless, special taxing of the Internet. Now it's time to make that ban on discrimination permanent."

"Our bill simply says you can't stick it to the online world," Wyden said. "We shouldn't discriminate against the most vibrant part of the economy."

Another prominent supporter of the Bill and former presidential hopeful, Senator John Kasich, said taxing Internet sales is a "relic of horse-and-buggy days, with no place in an economy that moves at the speed of light."

Although the new bill would outlaw new state and local taxes that target Internet access and e-commerce, it does not address the more vexed question of how the labyrinth of existing state, city and county sales taxes should apply to e-commerce. The only source of guidance on this issue comes from the US supreme court 's Quill decision, which established the "physical presence" test for applying existing sales taxes to e-commerce merchants, although the vagaries of this landmark decision make it difficult and complex to apply. State legislators are already finding ways around this by dusting off outdated and little used 'remote' sales tax laws that were originally put on their books to tax out of state mail order purchases.

Despite claims by lobby groups representing state governments and bricks-and-mortar retailers that not taxing the internet will cost millions in lost revenues, and result in a massive downgrading of local services, Wyden says that consumers, businesses and state and local governments are thriving under the current ban, citing an 8% jump in retail sales and a $35 billion surplus in state budgets in 1999 as proof not only that the internet tax ban is not causing harm to state revenues, but that business on both main street and the internet is booming.

"Across the nation, sales tax revenues to the states are way, way up. In California, sales taxes grew 12 percent in 1999, thanks to spectacular growth in the new economy," Cox said. "The evidence is now in: keeping discriminatory taxes off the Net is good for consumers, entrepreneurs, and the governments that tax them."

Cox and Wyden's views are also supported by the ACEC chairman Governor James Gilmore of Virginia, who says that The remote sales tax should be abolished on the basis that it is not usually collected by mail order companies anyway. He argues that taxes on the Internet should instead be considered on its own merits. "You are not automatically entitled to go over and tax (the Internet) just because it's there," Gilmore said, "You ought to make a case to the people that that tax is necessary."

The Bill is due to be considered by Congress on April 15, just a week before ACEC must deliver the findings of its long and heated investigation into taxes on the internet and e-commerce.

Governors Press Zero Burden Plan at US Senate Hearing

As if to emphasise just how divided American politics is on internet taxes, a Senate committee hearing on how to tax e-commerce was held the day before the latest Cox-Wyden Bill was put before Congress which proposes to make permanent the current 3 year ban on new internet taxes.

At the Senate budget panel hearings last Wednesday, Michigan Governor John Engler spearheaded the cause for allowing the states to tax e-commerce in his role as spokesperson for the National Governors Association (NGA).

Borrowing from the rhetoric of supporters of the current ban on new Internet taxes, Engler argued that traditional bricks-and-mortar merchants should not be discriminated against in favour of e-commerce merchants. According to Engler and the NGA, most states already have the right to tax the internet because of the remote sales tax laws that apply to out of state mail order purchases, and that it is simply a question of clarifying the law to allow states to solve their collection problems in applying their existing taxes to the internet.

But behind the Governors' rhetoric lies unashamed self-interest in protecting the state sales tax revenues that make up nearly 30% of their budgets. Engler warned the Senate committee last week that banning sales taxes on e-commerce would severely hamper the ability of state to raise the revenue required for crucial local services.

"It would be virtually unprecedented for the federal government to stomp on the most basic rights of the citizens and taxpayers of each and every state by determining how they may or may not raise revenues," said Engler.

In Engler's home state of Michigan, the legislature has already approved new regulations to invoke the state's remote sales tax on internet purchases, including a requirement for residents to declare out of state internet purchases on their tax return forms.

In support of its position, the NGA has proposed a 'zero burden' strategy to ACEC based on a system of 'trusted third parties' overseeing the collection of sales tax on the internet. But not all state governors are behind the NGA proposal, and support in Washington is even more divided, even though the Clinton administration has given the plan its tentative support.

Governor Warns Senate That Net Taxes Could Force E-Business Offshore

Appearing before the Senate committee for the 'no net taxes' camp was Massachusetts Governor Paul Cellucci, who warned that taxing Internet purchases could push e-commerce businesses offshore.

"We must not build a toll on the Information Superhighway," Cellucci said. "Unlike traditional brick-and-mortar businesses, E-commerce ventures are extremely portable and could easily move their headquarters offshore to an island like Bermuda where they would be immune from sales tax from this country."

Cox and Wyden were even more scathing in their criticism of the unfittingly named 'zero burden' plan, which they said would result in "a bureaucratic nightmare", or more precisely "bureaucratic water torture" as Wyden put it.

Within the Senate committee, opinions on the NGA plan were mixed. The committee Chairman, Republican Senator Pete Domenici from New Mexico, sided with Engler at the hearing, but a number of committee members were equally vocal in their opposition to taxing the internet, most notably Republican Senator Slade Gorton from the state of Washington (home to e-commerce giant Amazon.com).

ACEC Stalemate Means Big Speeches and Little Progress

The events of the past few weeks have ensured that what was certain to be an interesting next meeting of the US Advisory Committee on Electronic Commerce, is now set to be a highly charged event that should take centre stage in the political spotlight.

First there was Republican presidential hopeful Senator John McCain's pledge and challenge to rival George W. Bush to ban internet taxes permanently, which in light of McCain's victory over Bush in the New Hampshire primary has gone from political gamble to tactical victory in very short time. Then came the fightback by the National Governor's association who presented their 'zero burden' sales tax collection plan to the Senate Budget Panel last week in defence of their revenues.

With the new Cox-Wyden bill which would make permanent the current ban on internet taxes due to be debated by Congress just a week before ACEC delivers its report to Congress, the final ACEC meeting in George W Bush's home state of Texas on March 21-22 is sure be controversial and receive even more media attention than the slanging matches at last December's San Francisco hearings.

But despite the momentum, nobody realistically expects ACEC to reach a consensus decision on Internet sales taxes. In an election year where internet taxes has become a key strategic issue in the presidential election campaign, it is likely that a strongly divided ACEC will water-down its final report on internet taxes and throw this political hot potato back into the lap of Congress, and instead concentrate more on less contentious internet issues such as access taxes, online privacy, and consumer protection.

The Chairman of ACEC, Virginia Governor James Gilmore, has guardedly admitted recently that there is little room for consensus among the 19 commission members, and fellow Commissioner Grover Norquist, a supporter of the Cox-Wyden internet tax ban, has openly admitted that he might have to settle for a 3 to 5 year extension of the ban instead of a permanent ban.

In all likelihood, Grover Norquist's hint at a 3 to 5 year ban seems to be the most logical recommendation for ACEC to make, and also the easiest pill for Congress and the National Governors' Association to swallow in the current political environment. But regardless of the outcome, its going to be an interesting ride, particularly with the outspoken and confident John McCain looking to box the evasive George W Bush into a corner during the presidential nomination primaries over the coming months.

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