Internet Taxation: New Studies May Find Solutions

By Dotson, Betsy | Government Finance Review, October 1999 | Go to article overview

Internet Taxation: New Studies May Find Solutions


Dotson, Betsy, Government Finance Review


With the passage of the Internet Tax Freedom Act in the fall of 1998, many observers believed that the debate between state and local governments and Internet merchants was over, and state and local government revenues were the losers. In fact, the passage of the statute only set the stage for the final act. The issue of Internet taxation and the taxation of other remote sales transactions (i.e., mail-order sales) continues to confound both governments and businesses alike. It remains a focus of activity for federal, state, and local governments, as well as Internet providers, businesses selling goods and services via the Internet and catalogs, and Main Street merchants.

The Internet Tax Freedom Act

The final version of the Internet Tax Freedom Act, while opposed by state and local governments, was vastly improved over the legislation originally introduced. As passed, the Act provided for the following:

* a three-year moratorium on the imposition of new state and local taxes relating to Internet access or multiple and discriminatory taxes;

* grandfathering of taxes currently imposed on Internet transactions so that collection could continue; and,

* creation of a 19-member federal commission to examine issues relating to taxation of all forms of remote commerce. The commission is comprised of eight state and local government representatives and Main Street retailers, eight representatives of business, and three federal representatives. They are scheduled to make recommendations to Congress and the President by April 2000.

The Advisory Commission

The appointment and work of the federal commission, formally known as the Advisory Commission on Electronic Commerce (ACEC), was greatly delayed. Appointments to the commission were to be made by the majority and minority leaders of Congress. The initial selections, however, resulted in an imbalance on the commission in favor of business groups. A congressional standoff ensued, followed by the seeking of two local government organizations to forbid the commission to meet as constituted. With the impasse eventually resolved, the first meeting of the ACEC was held in June 1999. This meeting produced much procedural wrangling but little in the way of substantive progress. A second meeting was held in September 1999, with two other public meetings scheduled prior to the issuance of a final report. Information about the activities of the ACEC is available on its Web site at www.ecommercecommission.org.

Legislative and Political Concerns

The purpose of the three-year moratorium contained in the Internet Tax Freedom Act was to allow a period of study and examination by the ACEC before Congress enacted further legislation which might impact more drastically on state and local government taxation and revenues. However, despite the fact that the ACEC's work is just beginning, a few federal legislators already have called for a permanent moratorium on the collection of state and local taxes on Internet transactions. Senator Robert Smith (R-NH) has introduced legislation (S. 328) that would establish a permanent moratorium. Calling a permanent moratorium "the original goal," Senator John McCain (R-AZ), a candidate for president, has vowed to enact a permanent moratorium if he is elected.

The only other legislation to be introduced on this topic is that of Senator Ernest Hollings (D-SC). His legislation, S. 1433, the Sales Tax Safety Net and Teacher Funding Act, approaches the issue from a very different perspective. This bill would establish a trust fund with contributions from a federal retail excise tax of 5 percent on all remote sales. Distributions from the fund would be made to states based on population and poverty to be used for hiring elementary and secondary school teachers.

In addition, the U.S. General Accounting Office (GAO), an investigative arm of Congress, has received a request from a member of Congress to try to determine what the impact of the ever-increasing amount of Internet transactions will be on state and local government revenues. …

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