States covet tax on Internet sales

Home Channel News, Jan 10, 2000

Now that almost everyone is convinced that all products and services will be sold over, the Internet eventually, most are, almost equally ascertain that state governments will do everything possible to siphon off some of those sales.

On Oct. 21, 1998, President Clinton signed into law the Internet Tax Freedom Act, which established a three-year. moratorium on all local, state and federal taxation of online transactions, and set up a 19-person Advisory Commission on Electronic Commerce to consider Internet tax issues.

The debate didn't end there. At last month's National Governors Association meeting, the states' chief executives essentially endorsed a national sales tax that may include a levy on Internet sales. The valedictory edition of William F. Buckley's "Firing Line" television program on Dec. 19 devoted two hours to this topic. Presidential hopeful Sen. John McCain recently jumped on the No Internet Tax bandwagon.

Forty-five states and the District of Columbia impose sales taxes on store-bought products that range from 4 percent to 7 percent of the purchase price. The importance of these taxes, in an era of scaled-back assistance from Washington, has grown to the point where 33 percent of Ohio's 1998 income came from state sales tax; and Illinois' sales tax rose 49 percent, to $5.8 billion, between 1989 and 1998. When Georgia eliminated sales tax on groceries in 1998, it relinquished $550 million in tax revenue.

The sustained economic boom nationwide allowed states to collect an estimated $11.4 billion more in sales taxes than were budgeted for in 1999. But states are getting nervous about what the long-range ramifications for their tax bases will be if shoppers start shifting purchases in droves to a tax free Internet environment. If tax revenues start eroding, how will public services be paid for?

The Supreme Court ruled in 1992 that governments couldn't force' a remote seller, like a catalog retailer, to withhold state taxes unless that seller has a "physical presence" in the state. What constitutes "physical presence" in boundary-less cyberspace?

Utah Governor Mike Levitt discussed this point in a recent interview on National Public Radio. In California, Levitt said he ordered groceries online from a company headquartered in New York. The items were shipped from a New Jersey ware house to Levitt's home in Salt Lake City. Which of the four states would be able to charge sales tax? One of them? All of them?

Levitt suggested that the state where the user lives. should get the tax. Some conservative critics counter that this would be tantamount to taxation without representation; businesses could be asked to withhold taxes for states where they get no benefits from services rendered.

Others argue that the states should reduce spending and wean themselves off of their insatiable appetite for more sales and user taxes. Certainly, voters and consumers would agree. Oregon's voters, by a 3-to-1 margin, opposed a sales tax last year. And the "tax-free" weeks that states like New York and Texas. have offered on merchandise purchases have been wildly popular with both shoppers and merchants.

A lot of this may be moot if, as expected, most dealers be come "click and mortar" operations, with stores and online selling sites. But if the nation's economy softens, it's going to be awfully hard for state legislatures to keep their paws out of that Internet pot of gold.