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Gilmore
Proposal: "No Internet Tax" by Gov. James S. Gilmore (VA) on 11/14/99 of
Office of the Governor
of Virginia Topic:
Proposal, Gov.
Gilmore |
I
No Internet
Tax
A Proposal Submitted to
the "Policies & Options" Paper Of the Advisory Commission on Electronic
Commerce
By
Governor James S.
Gilmore, III Commonwealth of Virginia November 8,
1999
Policy Statement (Proposed
for Consensus Adoption and Inclusion In "Policies & Options"
Paper)
The Internet represents
a marvelous tool of empowerment for citizens, consumers and
entrepreneurs all over the world. It is the most transforming
technological development since the industrial revolution. As we
enter the 21st Century, American culture and our economy depend
vitally upon the Internet's full development. Therefore, American
public policy should embrace the Internet to realize all of its
social as well as economic benefits.
Evidence that the Internet is driving America's economic
boom can be found everywhere and was most recently documented in a
study conducted by the University of Texas' Center for Research in
Electronic Commerce. According to the study, the nation's
Internet-based economy grew 68 percent last year to produce over
$507 billion in business revenues. The Internet economy has created
2.3 million new jobs. The Internet and information technology sector
now accounts for more than half the capital investment in our
country. And of the tens of thousands of new businesses being
created every year, research shows nearly one in three did not exist
prior to 1996. One sector of the Internet economy – electronic
commerce – accounted for nearly 1 million of the 2.3 million jobs
created by the Internet.
It is
beyond dispute that the Internet economy is creating new jobs and
new business opportunities and contributing to the stock market
boom. Even in rural areas long ago ignored by the economic progress
in metropolitan areas and the interstate highway system, small
businesses are prospering by selling products worldwide.
VirginiaDiner.com in rural Wakefield, Virginia, is a perfect
example. The nation's huge investment of tax dollars in the
interstate highway system left Rt. 460, a classic small town "Main
Street," virtually abandoned years ago. Those people who happened
through Wakefield could stop into the Virginia Diner and buy a cup
of coffee and a can of Virginia peanuts. But the Internet economy
has empowered VirginiaDiner.com to sell Virginia peanuts to
consumers from Spain to California to Tokyo. The boom in Internet
sales has led the Virginia Diner to increase its employment in
Wakefield from 70 to 120 employees over the last three years and
this year the Diner will invest over $100,000 in new computer
hardware and software.
All of this
economic activity and increased productivity is creating new wealth
and increasing tax collections by governments. Indeed, the Internet
economy has local, state and federal tax coffers fuller and growing
faster than ever through the massive job creation and capital
investment occurring in every state in the Nation. The tax
collector's glass is not half-empty. It is full. In fact, the
National Governor's Association reports that the states collectively
took in $11 billion in tax surpluses in 1998 despite tax cuts
totaling $5.3 billion in 1998 and $4.9 billion in 1997. And
end-of-year balances for all states totaled $36 billion by the end
of 1998.
Underlying all the
documented numbers is a profound social and economic transformation.
Every sector of our society is challenged to adapt to the new
Internet economy. Business is being conducted differently. Business
models are changing. Companies are more efficient and productivity
per employee is increasing exponentially. The same transformations
are occurring in education, in the way Americans live, obtain
information and conduct their own lives. Fundamentally, this
technology empowers. It empowers businesses, business leaders,
employees, educators, and mostly it empowers each individual
citizen. All of this evidence validates
the maxim: The Internet changes everything. More to the point, the
Internet changes everything including government. Old rules do not
work well in this new borderless economy. Sometimes they do not work
at all. Regardless, change is everywhere, and government has to
change as well.
In the Internet
economy, government at all levels must change its policies as well
as the way it operates. The private sector is producing a 15 percent
increase in revenues and productivity per employee as a result of
the Internet according to the University of Texas' Center for
Research. Government must marshal the Internet to become equally as
productive per public employee in the delivery of government
services. The result should be a dividend to American taxpayers
through lower-cost, more efficient government. The savings should be
re-prioritized to other government services so that no city goes
without fire trucks or schools, and taxes should be kept low.
There is a contrary view. The
contrary view is that the Internet changes everything except
government. That view wishes to impose a depression-era sales tax
based on the locus of a business transaction upon Internet-based
transactions which occur personal computer to personal computer from
any corner of the world. That view was characterized by Ronald
Reagan many years ago when he told a group of small business
leaders: "The government's view of the economy could be summed up in
a few short phrases: If it moves, tax it. If it keeps moving,
regulate it. And if it stops moving, subsidize it." In the new
economy, what's moving is the Internet and the business and wealth
it generates, and many in government want to tax it, and eventually
regulate it, despite tax surpluses being generated by it across the
United States.
By burdening Internet
consumers with new tax burdens, by imposing new tax collection
millstones upon Internet-based entrepreneurs, or reporting all sales
transactions to third-party tax collection agents of the government
who would view the private purchases of each consumer, the evidence
is clear that government would severely inhibit economic growth of
the Internet economy and particularly impact small Internet
entrepreneurs and consumers. University of Chicago Professor Austan
Goolsbee presented to the Commission compelling evidence that the
volume of sales over the Internet would decline 30 percent if sales
taxes were imposed on Internet commerce. That impact is confirmed in
survey after survey. BizRate.com found that 75 percent of on-line
customers would buy less on-line if sales taxes were imposed and a
survey by Fabrizio-McLaughlin & Associates found that 34 percent
of Americans would be less inclined to make purchases over the
Internet. Ernst & Young also presented evidence showing
tremendous costs to Internet-based retailers to collect such taxes
across all states.
Imposition of
sales taxes on remote on-line sales may also significantly reduce
the value of Internet-based retailer stocks. Currently, no major
Internet-based retailer (or "e-tailer") in America is making a
profit. Internet-based retailers are operating at losses to build
name identification, customer base, and market position. Since price
continues to be mentioned as one of the primary concerns of on-line
shoppers, e-tailers are keeping their prices and mark ups as low as
possible to build customer loyalty. Since a sales tax would increase
the bottom line to the customer, most e-tailers would likely reduce
their prices to keep the bottom-line price paid by the customer to a
minimum. Many already do this to absorb the added costs of add
shipping and handling. Sales taxes collection costs would be an
additional overhead cost absorbed by each e-tailer. The upshot is
that most of the extra costs of collection and the actual sales
taxes would be absorbed into the overhead of the businesses,
delaying profitability for at least another 2-3 years for major
e-tailers. Delayed profits mean reduced stock value in the
short-run.
Moreover, the history of
taxation confirms that any new tax burdens on Internet-based
transactions will not stop at the taxation of tangible goods sold
over the Internet. The entire economy is shifting away from tangible
goods to services and information. According to a study conducted by
Ernst & Young, consumer spending for services has exceeded the
growth rate of spending on durable goods by 35 percent and the
growth rate of spending on non-durable goods by 50 percent over the
last decade. Ernst & Young estimates that 63 percent of current
business-to-consumer Internet sales are intangible services. If the
old way of government thinking prevails and the Internet changes
everything except government, then the American people will soon
face taxes on their access to digital goods, financial services,
entertainment and information transmitted from personal computer to
personal computer. Since the Internet's purest application is the
delivery of services, such new tax burdens would inevitably inhibit
the Internet's expansion as well as consumer privacy.
In return for inhibiting the growth of
the Internet economy, governments would increase their sales taxes
by approximately 1 percent of the sales tax base over the next four
to five years. Professor Goolsbee estimates that by 2003, sales
taxes on Internet-based sales would amount to no more than 1.4
percent total sales taxes collected nationally. To the extent many
on-line consumers are switching from catalogues to the Internet, the
1.4 percent largely reflects a revenue-neutral shift for state and
local tax collectors.
But the costs
of impeding the Internet economy's growth and the public and private
benefits attendant to that growth could be far greater than an
addition of 1.4 percent in sales tax collections for governments.
Therefore, government has sound public policy reasons to free the
Internet and the commerce it generates from taxes and the regulatory
burdens and privacy intrusions necessary to enforce a sales tax
system at its inception.
There are
those who oppose tax-freedom for consumers on the Internet because
they say it effects a "tax preference" or a "public subsidy" for
Internet commerce. To the extent tax-free treatment is viewed as a
preference or subsidy of the Internet, American public policy should
embrace it in order to realize the Internet's tremendous social and
economic potential.
Tax preferences
and public subsidies of certain business sectors are precedented,
especially where public benefits as great as those generated by the
Internet can be obtained. Many states and localities award new
companies subsidies of tax dollars to attract them. In the
entertainment industry, cities and counties have subsidized the
construction of multi-million dollar stadiums to attract the social
and economic benefits of professional sports teams. In the retail
industry, throughout the decades of the 1960s, 1970s and 1980s,
suburban counties invested millions of tax dollars to subsidize the
construction of shopping malls, much to the detriment of inner city
"Main Streets." And in the 1980s and 1990s, many states and
localities and the federal government have provided tax preferences
to inner city and rural "Main Streets" – commonly known as
"enterprise zones" – in order to revive business activity. The fact
that certain business sectors and sales transactions (e.g.,
services, the sale of securities, repairs) are not currently subject
to sales taxes is a tax preference or subsidy of sorts. Indeed,
inherent in any tax code are preferences for some behaviors deemed
socially and economically beneficial, whether it be home ownership,
research and development by a company, employing a person from
welfare, or the sale of medical services. Moreover, all local
businesses make use of the public resources like roads, sewers,
police, fire, schools and colleges where they are located, thus
receiving direct and indirect subsidies from their local government.
All of the above represent daily public subsidies or tax preferences
for some business sectors over others. Likewise, the Internet
produces such tremendous social and economic benefits that the
public's interest in keeping it tax-free is justifiable as sound
public policy.
Professor Goolsbee
estimates that a substantial portion of on-line shoppers are new
shoppers and concludes that, at present, research "does not seem to
point to intense competition between retail and online commerce at
present – consistent with the notion of Internet as trade creator."
Thus, there is little evidence that shopping malls and Main Streets
will be put out of business by the Internet in the same way malls
put Main Streets out of business over the last three decades.
According to the evidence, it is just as likely that purchases in
stores will continue to increase. It is equally evident that sales
taxes on purchases in stores will continue to increase and that
proposals to tax Internet commerce represent an effort to tax new
commercial activity (or at least commercial activity shifting from
catalogues to the Internet).
In any
event, tax freedom on Internet-based transactions regardless of
where a business has physical nexus will create an even-playing
field for all retailers, even those national chains that adapt to a
"click and mortar" model. All businesses will compete equally when
they compete on the Internet.
Failure to provide tax-free trade over the Internet
within the United States will necessarily lead to businesses
locating offshore to gain an advantage over domestic businesses,
especially in the service, digital goods and information sectors.
For all worried about discriminatory tax treatments, Congress should
consider the probability that some Internet merchants, especially
those who sell digital goods, would simply locate off-shore
somewhere in a place that doesn't require them to ask consumers
questions about where they live or to collect sales taxes.
For all of these reasons, American
public policy should embrace the Internet and the borderless economy
it creates rather than impose old ways of thinking and antiquated
locus-based tax structures upon it.
Policy Proposals (To Be Included in Policy Options and
Proposed for Adoption by Commission)
Sales Tax Treatment of Electronic Transactions
1. Congress Should Prohibit
All Sales and Use Taxes on Business-to-Consumer Internet
Transactions: The federal moratorium on
Internet taxes should be amended to prohibit all sales taxes on
remote business-to-consumer transactions facilitated by the
Internet. The current moratorium should be amended to create a
tax-free zone for consumers and businesses over the Internet as
follows:
- The Tax Freedom Act should be amended to
prohibit the imposition of any sales tax on all remote
business-to-consumer purchases over the Internet;
- The prohibition should expressly apply to the
sale of tangible or intangible goods and property, intellectual
property, digital goods, services, securities, information and
content, and entertainment;
- The temporary moratorium contained in the Tax
Freedom Act should be extended to a permanent prohibition against
the imposition of tax burdens on electronic commerce.
Income Taxation &
Business Activity Taxation in a Cyber Economy
2. Congress Should Protect
Companies from Unfair Income & Business Activity Taxes Imposed
Upon Them Due To Their Virtual Presence In States: States traditionally have imposed their corporate income
and related business activity taxes only upon businesses that
physically exist in their jurisdictions. Traditionally that meant
companies could be taxed only if they maintained an office or
employees in the state. However, the Internet makes companies
ubiquitous, and more state tax collectors have begun to impute
physical presence to companies due to their virtual or electronic
presence, or due to their ownership of equipment needed solely to
transfer information in a cyber economy. The business community's
concerns over being subjected to unfair income or business activity
taxes has been heightened by recent court rulings in several states
that "impute" physical presence in various legal contexts due to
their virtual or electronic presence.
Commissioner Dean Andal, Vice Chairman of the California
State Board of Equalization, proposes that we amend Public Law
86-272 (codified at 15 U.S.C. §§ 381-384) to create a single uniform
jurisdictional standard for taxing all companies engaged in
interstate commerce – "substantial physical presence" – and to
codify a clear definition of "substantial physical presence" in a
way that protects companies from unfair taxation due only to
Internet-based presence. The Commission should adopt the Andal
proposal to amend P.L. 86-272 as follows:
Extend the protections of P.L. 86-272 to all state and
local government taxation;
- Provide express protection to companies that
sell intangibles, services and information in addition to the
current protection for only the sale of tangible goods;
- A company that owns only intangible property
in a state would not have "substantial physical presence" in a
state and would not be subject to income or business active taxes
in that state;
- A company that uses an Internet service
provider or that places digital data on an Internet service
provider's web server in a state would not have "substantial
physical presence" in that state and would not be subject to
income or business activity taxes in that state;
- A company that uses communications services
in a state would not have "substantial physical presence" in that
state and would not be subject to income or business activity
taxes in that state;
- A company that is "affiliated" with another
company in a state would not have "substantial physical presence"
in that state and would not be subject to income or business
activity taxes in that state.
Taxes on Internet Access
3. Prohibit All Taxes on
Internet Access: The Tax Freedom Act
currently permits states to impose taxes on consumers' monthly
access charges in those states that already had adopted them before
October 1, 1998. The grandfather clause for access taxes was
controversial. The National Governor's Association lobbied to extend
taxes on Internet access and won the day in Congress. Consequently,
the tax on Internet access has become a bargaining chip for those
who want to impose sales taxes on Internet transactions – a more
lucrative tax for government. But that bargain presents a false
choice for the Internet economy. The grandfather clause should be
eliminated and all states should be prohibited from imposing taxes
on the ability of the American people to log on the Internet and
empower their lives. To effect this amendment, Congress needs simply
to eliminate the grandfather clause contained in the current Act.
Taxes on Telecommunications
4. Abolish the Federal 3% Excise Tax on Telephone
Service: A tax on a consumer's telephone
is a tax on Internet access because most Americans use their phone
lines to log on the Internet. Aside from its limitations on personal
empowerment, a tax on one's telephone is regressive. Congress first
enacted a federal tax on each consumer's local and long-distance
telephone service as part of the Spanish War Act of 1898 to fund
America's effort in the Spanish-American War. At the time few
American citizens owned telephones and the tax was premised as a
luxury tax. Over the ensuing three decades the tax was repealed and
reenacted several times. Since 1932, the tax has been levied at
varying rates on a continuous basis. The tax was extended to local
telephone services a few months prior to the U.S. entrance into
World War II by the Revenue Act of 1941. Throughout the decades of
the 1960s, 1970s, and 1980s, the tax was reduced and scheduled for
elimination, but that never occurred due to budget deficits in the
early 1980s. In 1987, the tax was made permanent at 3 percent. Today
the tax produces approximately $5 billion for the federal treasury's
general fund, or .3 percent of the total federal budget. The
Congressional Budget Office estimates that figure will double over
the next ten years. At the same time, the federal government expects
budget surpluses over the next ten years.
The Commission has pending before it a resolution
proposed by Commissioner Grover Norquist to eliminate the federal
excise tax on local and long-distance telephone services. The
Commission should adopt Commissioner Norquist's resolution and the
federal excise tax on telephone service should be eliminated.
However, equally onerous to the
backbone of the Internet is the panoply of tens of thousands of
varying state and local taxes imposed on telephone services. By some
counts telephone companies spend millions of dollars each year to
file tax returns in over 40,000 taxing jurisdictions. Commissioner
Mike Armstrong has spoken eloquently and cogently of this tax and
regulatory burden which costs consumers millions of dollars in the
cost of telephone service.
It would
be difficult for Congress to try to solve this burden due to
government dependency on the existing telephone taxes and the wide
variance of state and local taxing authority. Therefore, I propose
that Congress provide each state an incentive for three years to
simplify their complex systems of multiple tax burdens in the
process of eliminating the federal excise tax according to the
following plan:
- The federal government will immediately
eliminate 2% of the 3% federal excise tax. The federal government
would continue the tax at 1% for three additional years. At the
conclusion of three years, the federal excise tax would be
completely abolished at the federal level.
- This tax cut will immediately save the
American people over $3.3 billion this year, doubling to $6.7
billion ten years from now.
- Each state would be called upon to
voluntarily simplify its system of multiple and overlapping state
and local telecom taxes into one rate per state and one tax
collection point. Internal distribution of telecom taxes would be
handled internally by each state. Each state would have three
years to accomplish this simplification. Each state that
simplifies its system within three years will automatically be
ceded the federal 1% telecom excise tax applicable to phone
services used in that state and the federal government would stop
collecting the 1% tax from phone bills in that state altogether.
- In return for simplifying their existing
taxes, state and local governments would be ceded a new revenue
stream from the federal government amounting to $1.7 billion this
year and doubling to $3.4 billion ten years from now. Those funds
would compensate states and localities for any sales taxes
foregone to Internet-based commerce. Since Ernst & Young and
Professor Goolsbee estimate that interstate Internet-based sales
would have provided states only $170 to $200 million in sales
taxes in 1998, this new revenue stream will create an immediate
tax windfall of $1.5 billion for states and localities.
- American consumers would benefit because the
cost of telecommunications services could be reduced in a
competitive market to reflect savings in company overheads.
Reduction in telephone costs reduces the cost to log on the
Internet.
- States that do not simplify state and local
telecom taxes would not be ceded the 1% federal tax and would lose
the chance after three years when the federal tax would
automatically be abolished at the federal level.
International Tariff
Treatment of E-Commerce
5.
No International Tariffs on
E-Commerce: International taxes and
tariffs pose a tremendous threat to U.S. global competitiveness. The
Commission has voted unanimously to oppose the imposition of any
international tariffs on Internet-based sales and transactions. The
Clinton-Gore Administration should vigorously oppose international
tariffs on transactions conducted electronically.
International Tax Treatment of
E-Commerce
6.
No International Taxes on
E-Commerce: The United States should
oppose the imposition of any international taxes on Internet-based
sales and transactions originating in the United States to mirror
the United States' own domestic "tax free zone" over the Internet.
The Clinton-Gore Administration should vigorously oppose taxes by
foreign countries on U.S. sales conducted electronically, including
bit and byte taxes.
Abolish the
Digital Divide for All Consumers
7. Amend Federal Welfare Guidelines to Permit States to
Spend TANF Surpluses to Buy Computers and Internet Access for Needy
Families: Due to the success of
welfare-to-work reforms and the booming economy, welfare rolls have
been reduced dramatically across the United States. Consequently,
many states have accumulated surpluses of federal TANF (Temporary
Assistance to Needy Families) funds. Under federal statutes and
regulations, states arguably could use TANF funds to empower needy
parents and their children with computers and Internet access.
However, there is some doubt regarding the legality of using surplus
TANF funds (unliquidated obligations and unobligated balances) to
put needy families on-line. Therefore, Congress should clarify
federal law to permit states to use TANF surpluses to purchase
computers and Internet access for needy families.
America can abolish the digital
divide and empower needy families in rural America and inner cities
to participate in the Internet economy on an even playing field with
affluent families. Poor families should have the same tax-free
opportunity to purchase clothing and food, to invest in securities,
and to obtain critical information about employment and educational
opportunities as anyone else. TANF surplus funds are a rational and
available source of funds to accomplish this objective without
increasing taxes and without creating all-new entitlement programs.
Once federal law is amended, each state should act quickly to
partner with computer companies and Internet service providers for
the lowest prices for the most up-to-date hardware and software and
swift installation. # # #
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