The nation's governors adopted a sweeping new policy to protect billions of dollars worth of state and local sales tax revenues through rejection of proposed federal legislation, the so-called Internet Tax Freedom Act, to preempt current state and municipal taxes and fees on the Internet.
Instead, the governors called on the President and Congress to adopt a new federal law to expand the ability of states to require out-of-state Internet or electronic retailers and mail-order merchants to collect and remit a single, statewide sales tax. Immediately after the action, Senate Majority Leader Trent Lott (R-Miss.), who is scheduled to give a keynote address at the Congressional City Conference on Monday morning, March 9, vowed to block Senate action on pending legislation to bar cities and states from collecting already-owed or future sales taxes on Internet and electronic commerce goods and services.
The action came as the nation's governors concluded their 1998 Winter Meeting focused on meeting the challenges of the twenty-first century. The governors achieved consensus on key policies to provide direction for the 1998 Congressional session, including the adoption of positions on transportation, education, regulatory reform, federal tax reform, the tobacco settlement, workforce development, and Indian gaming.
But the central issue of the meeting was to achieve consensus on the Internet plan. The plan would have major impacts on state-local relations and tax revenues. It could lead to significant preemption of current city revenue authority. But the proposal could also shore up a critical source of municipal revenue to finance public services.
Ohio Governor George Voinovich, a past NLC President and current Chairman of the National Governors' Association appointed Govs. Michael Leavitt of Utah and Roy Romer of Colorado as the lead governors on Internet development. Voinovich said the two governors would meet with the White House, members of Congress, the business community, and municipal leaders this year to work out a consensus policy that addresses the many, conflicting concerns.
At NGA's closing plenary session, the governors adopted as their proposal the Internet Development Act of 1998. The proposal would reward states that achieve a simpler, fairer electronic commerce tax policy by allowing them to collect sales tax from businesses selling merchandise on the Internet. In exchange, states would limit a range of other Internet taxes, such as access fees.
During NGA's four-day meeting, the governors spoke to the President and members of Congress about the dangers of federal preemption of current and future revenues. States and local governments depend on existing sales and excise taxes to generate about 50 percent of total state and local tax revenues. These revenues support a wide range of crucial public services, including police protection, education, community services, and health care. The broad preemption being considered in Congress would seriously erode cities' and state' abilities to provide those services.
The governors' proposal would:
* prohibit new federal, state, or local taxes on Internet access fees;
* permit states which established a single statewide sales tax base and rate to require out-of-state sellers to collect and remit sales taxes on all mail-order and electronic commerce purchases;
* eliminate or preempt different local sales taxes; and
* allow each state to determine how to distribute to local governments their share of the out-of-state sales tax revenues.
Current federal laws bar cities and states from requiring out-of-state sellers from collecting state and local sales taxes, unless the company has a physical presence in the destination state. In return for the proposal to require such collection, the governors indicated a willingness to mandate the elimination of variable local rates and to support a federal preemption of taxing Internet access. …