By Larry Jones

In a dramatic move on March 8, The United States Conference of Mayors and the National Association of Counties filed a lawsuit in Federal District Court in Washington, D.C. to prevent the Advisory Commission on Electronic Commerce from meeting or taking any action. The Conference and NACo are seeking court action because the Commission has been improperly constituted under the enabling legislation. Although the new 19-member body was supposed to have an equal number of representatives from the business sector and state and local governments, that didn’t happen. Instead, business representatives make up a controlling majority of members. In effect, state and local officials have been denied the equal voice that Congress intended them to have on the Commission. If this illegal imbalance is not corrected, business representatives will be able to influence critical recommendations that could impact the future revenues of almost all state and local governments.

Under the Internet Tax Freedom Act, which was signed into law last October, congressional leaders were required to appoint eight representatives from state and local governments, and eight from the business sector. But only six State and local officials were appointed (3 governors-Utah Governor Michael Leavitt, Virginia Governor James Gilmore and Washington Governor Gary Locke; 1 mayor-Dallas Mayor Ron Kirk; and 2 other state officials-Virginia State Delegate Paul Harris and California Equalization Board Chairman Dean Andal) while nine business leaders and 1 private citizen were appointed. Among other duties, the Commission is charged with the responsibility of examining the impact of state and local sales taxes on electronic commerce and recommending to Congress whether or not such taxes should be applied to sales made over the Internet and similar forms of commerce.

State and local officials consider the work of the Commission to be critically important since its recommendations could affect their future revenues. Forty five of the 50 states rely on the sales tax which, on average, account for an estimated 49 percent of total state revenues. Further, it accounts for an estimated one third of local revenues. If legislation is enacted that prohibits state and local sales taxes on Internet sales, it will undermine state and local tax systems. Further, it will give Internet businesses an unfair competitive advantage over Main Street businesses.

To put the issue in focus, Senate Majority Leader Trent Lott (MS) recently shared a few statistics on the growth of the Internet. He said "there are an estimated 66,000 new users a day, e-commerce is growing at about 200 percent a year and web sites went from 10,000 to 3.2 million in just 3 years." With this kind of growth, it won’t take long for state and local governments to feel the pinch from lost revenues as people switch from making purchases on Main Street where taxes are required to making tax free purchases over the Internet.

This class action lawsuit was filed by attorneys Melisa H. Maxman and Michael M. Baylston with the law firm of Duane Morris and Heckscher in Philadelphia. Plaintiffs in the case include Conference president and Salt Lake City Mayor Deedee Corradini, former Conference president and Knoxville Mayor Victor Ashe on behalf of the Conference membership; and NACo president and Wake County (N.C.) Commissioner Betty Lou Ward and former NACo president and Hennepin County (MN) Board Chairman Randy Johnson on behalf of the NACo membership.

The nine business representatives and the private citizen were named as defendants in the case: James Barksdale, president of Netscape, John Sidgmore, president of MCI/World Com., Stan Sokul, president of the Direct Marketing Association, Robert Pittman, president, America Online, Theodore Waitt, chief executive officer, Gateway 2000, Inc., Michael Armstrong, chief executive officer, American Telephone and Telegraph, David Pottruck, president, Charles Schwab Corporation, Richard Pearson, president, Time Warner, Inc., Grover Norquist, president, Americans for Tax Reform and Gene Laburn, president, National Conference of Commissioners on Uniform Tax Laws.

In filing the case, lawyers pointed out the many problems that are likely to result from imbalanced representation. First, under the Act, 9 members constitute a quorum for conducting business of the Commission. Because business leaders hold a 9-member majority, the lawsuit claims they can "...hold a legally binding meeting and conduct official Commission business outside of the presence of any representatives of state and local governments." Further the case asserts that "...the viewpoints and issues important to state and local governments...cannot be assured a voice at any point on issues before the Commission." It was also pointed out that by giving business representatives a simple majority, state and local representatives cannot prevail on any contested issues. State and local governments also stand to lose a vital source of revenue if the business representatives, who comprise an unlawful majority of the Commission, work to ensure that state and local taxation of Internet sales cannot be enforced.

The Conference and NACo filed legal action after trying unsuccessfully to get congressional leaders to correct the illegal imbalance in the Commission membership. In a January 22 letter signed by the two organizations and other state and local groups, congressional leaders were urged to appoint additional government representatives as required by law. After congressional leaders failed to take action, the Conference sent a letter on February 10 notifying them of its intention to file a lawsuit unless the membership imbalance was corrected by March 1.

Although congressional leaders have been notified about the pending lawsuit, no changes have been made in the Commission membership. However, according to statements in the March 2 Congressional Record, both Senate Majority Leader Trent Lott (MS) and Senate Minority Leader Tom Daschle (S.D.) have acknowledged the imbalance in membership. And according to Lott, the Congressional leadership is "taking another look at the current makeup of the membership and considering options to resolve the impasse."