August 23, 2001 Governors Show Support for Equitable E-Taxing The governors of 42 states, Guam, and American Samoa have sent a letter to all members of the U.S. Congress urging that legislation extending the moratorium on taxing Internet access include a provision that allows states to simplify the existing sales tax system to permit the taxation of sales made online. The letter stated: "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. To do otherwise perpetuates a fundamental inequity and ignores a growing problem." The letter was a step by a clear majority of states to influence Congress as it considers the 1998 moratorium on taxes exclusive to the Internet, which expires on October 21. On August 2 the House Judiciary Committee's Subcommittee on Commercial and Administrative Law passed the "Internet Tax Non-discrimination Act" (H.R. 1552), sponsored by Representative Christopher Cox (R-CA). The bill, which extends the current ban on any new Internet-specific taxes but does not address the sales tax issue, was sent on to the full Judiciary Committee. The full committee is expected to consider it in September after the congressional recess. The E-Fairness Coalition, which includes ABA and most of the regional bookseller associations, and other e-fairness advocates were disappointed by the House bill, arguing that millions, possibly billions, of sales tax dollars are going uncollected when people purchase products through the Internet, giving those online businesses an unfair advantage over other types of stores. E-fairness supporters claim that loss of these sales tax dollars affects local communities because it risks states' ability to collect the revenue needed for education, police, and other essential services, and could lead to increases in state property or income taxes. Opponents of Internet sales taxes say that electronic commerce is composed of nascent, fledgling businesses that will be destroyed by sales taxes. Further, they point out, with about 7,500 state and local taxing jurisdictions across the country, computing and collecting proper taxes based on the purchaser's home residence would be difficult, if not impossible. Also at issue are so-called business-activity taxes, which states can impose if online retailers have distribution facilities or other operations in a state although their headquarters are in another state. Online retailers have argued for a single tax rate per state, regardless of the mode of transaction--online, catalogue, or bricks-and-mortar store. The states, however, have sought flexibility to set different tax rates, according to a source close to Senate Commerce Committee negotiations, as reported in the Washington Post. How much revenue is lost by failure to collect Internet sales taxes is unknown, but some estimate it will be as high as $13 billion by 2004. The impact on state programs dependent on sales taxes, including education and other services, could be devastating. Quoted in the Washington Post, G. Thomas Woodward of the Congressional Budget Office told a recent Senate hearing that the loss "could be large enough to compel many states to choose between reducing spending, or seeking new revenues through higher tax rates or new taxes." Members of the National Governor's Association who failed to sign the letter were from the states of California, Colorado, Delaware, Georgia, Massachusetts, New Hampshire, New York, and Virginia, and from Northern Mariana Islands, Puerto Rico, and the Virgin Islands. -Nomi Schwartz Topics: Internet Commerce, Sales Tax Initiative,