By Larry Jones

At the first meeting of the Advisory Commission on Electronic Commerce, June 21-22 in Williamsburg, Virginia, many commission members tended to agree that simplicity and neutrality must be achieved before state and local taxes can be collected on Internet transactions that occur across state lines. Although sales taxes are owed on these transactions, states and localities are prohibited under current law from ordering merchants not physically located within their boundaries to collect such taxes. Since the Internet gives customers unlimited access to merchants across the globe, they can make selective purchases and avoid paying state and local sales taxes.

State and local leaders fear this problem will seriously erode and undermine their sales tax systems. Industry leaders, on the other hand, have argued that applying thousands of state and local sales taxes with different rates, and administrative requirements will stifle the growth of Internet commerce, which is the fastest growing sector of the economy. To address this problem, Congress enacted legislation last October establishing the 19-member commission which is comprised of 3 federal officials and 8 representatives each from state and local governments and industry. Its mission is to examine the impact of state and local sales taxes on electronic commerce and make recommendations to Congress by April 2000 as to whether or not such taxes should be applied to Internet transactions and other forms of commerce that occur across state lines.

During the meeting, Dallas Mayor Ron Kirk (the only mayor appointed to the commission) urged fellow members to develop recommendations that will ensure the continued growth of Internet commerce, but not to take a position that will remove a major revenue source from state and local governments. Kirk explained that sales tax revenues are used to fund critical public services such as schools, roads, law enforcement, and fire protection. Emphasizing the critical nature of these services at a press interview at the end of the first day, Mayor Kirk quipped, "when you are sitting at home in your virtual world and you have a short circuit and a fire breaks out, do you want us to send a virtual fire truck or a real big red fire truck?" The sales tax is a significant revenue source not only for Dallas, but also for 45 states and the District of Columbia, and many cities and counties across the nation. Without it, Kirk said state and local leaders will be forced to make some tough choices: either increase other taxes or reduce and/or eliminate some services.

Washington Governor Gary Locke expressed similar concerns and called on members not to make recommendations that provide a tax advantage to merchants who use the Internet. He said the state of Washington gets 48 percent of its total revenues from the sales tax and that 60 percent of the state’s budget is dedicated to education, which the state is fully responsible for funding. Governor Locke said a decrease in sales tax revenues would adversely affect the state’s ability to fund education. He said it would be ironic if the growth in Internet commerce, which depends heavily on highly trained professionals, ends up eroding the state’s ability to provide quality education.

Several industry representatives on the commission acknowledged that they could not see how one form of commerce could be favored over another. Although open to the idea of applying state and local sales taxes equitably to Internet and other forms of commerce, AT&T Chief Executive Officer Michael Armstrong said the commission must come up with recommendations that are tax-neutral, and that would simplify the collection of state and local sales taxes. He said his company submits 39,000 tax forms a year to comply with different state and local requirements. Keeping up with different rates, filing and reporting requirements could prove to be too challenging, particularly for small and moderate sized merchants that use the Internet.

To get merchants to collect state and local sales taxes on Internet transactions across state lines, MCI WorldComm Vice-Chairman John Sidgmore also believes numerous changes must be made. However, he feels it can be done "technically and otherwise." Also, Charles Schwab Corporation President David Pottruck challenged the commission to develop recommendations that would allow electronic commerce to continue to flourish without giving it favored tax treatment over other forms of commerce. To do this, he said state and local tax systems need to be fair and simple.

A few commission members expressed opposition. California Equalization Board Chairman Dean Andal doesn’t believe state revenues have been adversely affected by the explosive growth of Internet commerce and he doesn’t want to see the commission take any action that will stifle that growth. Another commission member, Stan Sokul, an independent consultant with the Association of Interactive Media, said he is opposed to authorizing state and local governments to impose a duty on merchants to collect their sales taxes if they are not physically located within their boundaries.

At the opening and the close of the meeting, commission members got into an intense debate over the appointment of the commission’s executive director, which was made by Virginia Governor James Gilmore, who was elected as chairman of the commission. After attempting unsuccessfully to discuss the matter in closed-session, Utah Governor Michael Leavitt questioned whether there was a conflict of interest in hiring Heather Rosenker as executive director when her husband, Mark Rosenker, serves as vice-president of public affairs for the Electronic Industry Alliance (EIA). Governor Leavitt also pointed out that Governor Gilmore had accepted a $263,000 in-kind contribution in office space from EIA. In response, Gilmore told members that the executive director was purely an administrative job and that she would be accountable to all commission members. After Mayor Kirk and several other commission members raised similar concerns about the appearance of a conflict of interest, Governor Gilmore offered to move the commission offices to George Mason University and in the end the commission approved Rosenker as executive director, subject to a review of EIA’s positions on electronic commerce.

The commission also set future meetings in New York on September 14-15, San Francisco on December 14-15, and Dallas on March 20-21, 2000.