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Third Meeting E-Commerce Commission Far From Consensus

By Larry Jones


On December 15 the Advisory Commission on Electronic Commerce ended its third meeting in San Francisco without moving any closer to a consensus on the key question it was created to address-whether or not state and local sales taxes should be applied to electronic commerce and remote sales. In most states, sales and use taxes apply to all commerce but state and local governments are prohibited by two Supreme Court decisions form requiring out-of-state merchants to collect their taxes. As a result of this restriction, since the late 60s and early 70s, state and local governments lost an estimated $ 3 billion in annual revenues from mail-order sales made by out-of-state catalogue companies. The Internet and electronic commerce presents a much bigger problem since customers can order form an unlimited number of out-of-state companies any time. What's at stake is an estimated $10 billion loss in annual revenues by 2003. And the financial impact is expected to grow exponentially in the out years.

The nineteen-member panel, which is responsible for reporting recommendations to Congress by April 21, is divided between those who favor applying the sales tax equally to all commerce and those who oppose applying it to electronic commerce. The anti-tax faction is led by Virginia Governor James S. Gilmore III, who chairs the Commission. During the San Francisco meeting Governor Gilmore urged commission members to support a proposal which he developed that would prohibit all taxes on sales to consumers via the Internet. A similar proposal has been introduced in Congress by Representative John Kasich (OH). This proposal would ban all state and local sales and use taxes on goods or services acquired through electronic commerce.

Numerous questions were raised about the proposals banning taxes on electronic commerce. Dallas Mayor Ron Kirk, who represents the Conference, and several commissioners were quick to point out that if sales and use taxes are banned on electronic commerce, it would undermine and most likely lead to the elimination of sales and use taxes as a viable resource. The reason, as several commission members explained, is that all merchants could set up a kiosk within there store to allow customers to purchase goods electronically and avoid paying sales taxes. To demonstrate the point, Mayor Kirk said "in a grocery store, if you have a line that says ‘pay your taxes' and a line that says ‘don't pay your taxes,' you're going to the line that says ‘don't pay your taxes'."

Under current law, merchants are required to collect the sales tax if they are physically located within the state. If the Gilmore/Kasich ban is adopted, these same merchants will not be required to collect sales taxes on Internet and electronic commerce. Currently state and local governments receive more than one third of their total revenues from the sales tax. If they lose this revenue source, they will have to increase other taxes such as income and/or property taxes to avoid drastic reductions in critical services like education, law enforcement and transportation.

South Dakota Governor William Janklow, Tennessee state Representative Matthew Kisber and Hennepin County (MN) Commissioner Randy Johnson presented the proposal endorsed by state and local groups. In summary, the proposal (Streamlined Sales Tax System for the 21st Century) relieves merchants from the burdens of collecting and remitting state and local taxes. It sets up a "Trusted Third Party" system (which could be a high tech or credit card company or both) that would use advance technology to interact with merchants and credit card companies. The TTP would collect money from the sale of goods via electronic commerce and remit to the merchants payment for the goods and services, and to state and local governments, the appropriate sales taxes.

States and merchants would participate strictly on a voluntary basis. The incentive for state and local government participation would be the potential for collecting taxes owed on remote sales. The incentive for merchants would be it wouldn't cost them anything, the elimination of audit risks, software needed to participate would be paid for by state and local governments, and no collection or remittance or reporting requirements. The proposal does not require federal legislation or a change in current "nexus policy,"and it protects the privacy of customers.

All of the state and local representatives made arguments that the Streamlined Sales Tax System proposal would level the playing field between bricks and mortar and online merchants. Governor Janklow charged that proposals aimed at not taxing Internet sales are "destructive." He also said success in business competition "should not be based on a loophole" in the tax law.

While many business representatives made arguments for a level playing field and voiced support for many of the principles embedded in the Streamlined proposal, they stopped short of endorsing it. The reason is they would like to see legislation approved that would give state and local governments the authority to require out-of-state merchants to collect state and local taxes. However, it is unlikely Congress would approve such legislation in this legislative environment when members from both parties are introducing proposal to ban state and local sales taxes form electronic commerce.

Testifying on behalf of the North American Retail Dealers Association, James M. Goldberg explained that the inability of states to collect use taxes (taxes that customers are required to pay on purchases from out-of-state merchants) has stifled the ability of its members to compete on a level playing field.  Goldberg said many of the companies in his association, which includes Wal-Mart, Kmart, and Radio Shack, are being forced to establish two types of companies-one that is required to collect sales taxes and a second company in cyberspace that is not. While these company want to continue collecting state and local taxes, they are positioning themselves to offer tax-free purchases if competition forces them to do so.

At a December 14 press conference, the e-Fairness Coalition, which represents over 350,000 brick and mortar and online retailers, urged that state and local sales taxes be equally applied to all commerce. During the press conference, business leaders called attention to a recent survey conducted on behalf of the Conference and the National Association of Counties which shows that most American taxpayers believe it is unfair that Main Street retailers must collect sales and use taxes, while Internet retailers don't. Eighty percent of American taxpayer believe that all retailers who do business in communities should collect sales taxes. Also nearly 60 percent specifically said they support sales taxes on goods purchases from Internet retailers. "The result of the survey don't surprise me at all," said Washington, D.C. Mayor Anthony A. Williams, who chairs the Conference Task Force on Electronic Commerce and Internet Technology. He further explained "it is obvious to the average taxpayer that our cities have got to collect sales taxes if we're going to provide basic city services. Our cities and states rely on sales taxes to put cops on the streets, keep or streets clean, and to educate our children. If local governments don't have the funds to provide basic services to our residents, everyone loses."


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