By Larry Jones
January 31, 2005

Conference Trustee and DeKalb (IL) Mayor Gregg Sparrow welcomed U.S. Senator Lamar Alexander (TN) and Illinois state Senator Steven Rauschenberger to the Urban Economic Policy Committee meeting on January 18. During his discussion, Alexander acknowledged the influence mayors had on members of Congress in the passage of the temporary extension of the Internet tax moratorium bill last year. He also urged mayors to continue to work with state and local officials and industry representatives in the Streamlined Sales Tax Project to come up with a legislative solution that will make collecting taxes on Internet sales simple and uniform.

In explaining mayors influence on the Internet tax moratorium bill, Alexander told mayors how Senator Diane Feinstein (CA) stood up on the Senate floor during debate on the bill and announced that she was changing her position. In explaining why, she held up a stack of letters from 135 mayors from California cities. Alexander said, "She had, like most members of Congress, said she would support legislation that would ban state and local taxes on Internet access. But what she hadn't realized, and what I think many members of Congress hadn't realized, is that many state and local governments depend, to great extent, on tax collection on telephone services. And according to Senator Feinstein, she said these cities told me they could lose ten to fifteen percent of their revenue base if this legislation goes through. So, I am changing my position."

The way the original bill was written, Alexander said it "would have potentially wiped out up to $12 to $15 billion of revenue that state and local governments collect from telephone companies for telecommunications services." He said this was being done to encourage high- speed Internet access. "I don't think high'speed Internet access needs any further encouragement. It's the fastest growing new technology in the world. What really galled me was Congress was essentially saying We're going to give a break to the high'speed Internet crew. We're going to take credit for it and make a speech about it and then send the bill to governors and mayors and let them pay for it."

Although Congress adopted a four-year extension of the Internet tax moratorium bill, which protects state and local governments from huge revenue loses, Alexander told mayors they can not relax because the issue will come back up this year as Congress is likely to consider various proposals that dealing with Internet taxes and telecommunications services. "The same forces that wanted to do this last time are still around wanting to do it," he said.

To address this issue, Alexander said he is pleased that state and local groups were meeting with representatives from the telecommunications industry, as he suggested to come up with what he called "an off campus solution" to the Internet tax and telecommunications issue. If a solution can be worked out, Alexander said it should be presented to Senator Ted Stevens (AK), who chairs the Senate Commerce Committee and other leaders in Congress. "I think they would accept it in a minute," he said. He also pointed out that both sides have good arguments for change: telecommunication companies don't want to deal with complex, burdensome regulations from thousands of different state and local jurisdictions; and governors and mayors don't want another federally imposed unfunded mandate that will weaken their revenue base.

In urging mayors to remain vigilant on the issue, Alexander in closing told mayors, "I am going to try to be a voice for strong state and local government. I can be Paul Revere on a horse when issues of federalism like this come out. But I can't be the minute men and women. You-ve got to do that."

Illinois State Senator and President-Elect of the National Conference of State Legislatures Steve Rauscheneberger told mayors that the Streamlined Sales Tax Project (a joint state effort to simplify the collection of state and local taxes on Internet and other remote sales) has made enormous progress. He said 21 states have enacted legislation to simplify their sales and use tax systems to comply with a simplification plan mutually developed by the states. He said the joint effort is proceeding on target for meeting its July 1 goal of enrolling enough states to participate in the Project to begin implementing the collection of taxes on a voluntary basis. Under the plan, at least ten state representing at least 20 percent of the nation's population must participate. If all goes well, enough states will have legislation in effect by July 1 to account for 24 percent of the nation's population.

Between July 1 and October 1, states will be allowed to petition the project's governing board for admission to the governing states, and representatives of the governing board will vote on each state's application based on it's compliance with the simplification standards. If the governing board finds that enough states are in compliance, many remote sellers across the nation have agreed to start collecting their taxes on a voluntary basis.

Rauschenberger said NCSL and the National Governors' Association have each contributed $50,000 for start up cost of launching the voluntary system starting October 1. If the project is successful, it will lay the foundation for asking for federal legislation that would require the collection of taxes for states that adopt the simplification standards. Senators Michael B. Enzi (WY) and Byron Dorgan (ND) are expected to introduce such a proposal in February or March.