"Federalism in the information age" was the way Senate Budget Committee Chairman Pete Domenici (R-N.M.) introduced the topic of taxation issues surrounding E-Commerce at a hearing before his panel held last Wednesday. Cities' concerns about the future of their sales tax revenues were well represented at the hearing.

Demonstrating deep divisions that don't follow party lines, two Republican governors presented sharply contrasting testimony. Governor John Engler of Michigan, voicing arguments long made by NLC, said the issue is not one of new taxes but of collecting existing taxes that consumers owe currently. In a broader sense, Engler said, the issue is one of "whether states will remain sovereign in their right to collect taxes."

Governor Paul Celluci (R-Mass.) urged Congress to extend the current moratorium, which applies narrowly to state and local enactment of multiple and discriminatory taxes on the Internet, "by making the moratorium permanent and extend it to sales taxes."

Celluci also attacked the National Governor's Association (NGA) proposal, "The Zero-Burden Plan," which would remove the cost and burden of collection from remote vendors.

Under NGA's evolving concept, a group of "trusted third parties" would be linked electronically to Internet sales companies, would handle all use tax collection duties and be compensated by the states for this work. In this way, the states would be taking a stride toward insulating remote vendors from audits and compliance activities and reduce the overhead of tax collection.

Many states do not offer a vendor discount to compensate merchants for the cost of tax collection duties but believe the interest earned on tax money before it is remitted to the states is sufficient compensation. …