Internet tax moratorium poses threat

Electronic commerce is growing fast, and, although it may benefit businesses and consumers, it poses a growing threat to the tax bases of local and state governments. The reason: Sales over the Internet, like catalogue or mail order sales, are not subject to taxation.

With more than 40 million people now using the Internet – twice as many as a year ago – it is not surprising that businesses are reaping substantial benefits from offering their goods and services in cyberspace. Meanwhile, local governments that viewed the Internet as a legitimate tax base are now wringing their hands because seven states (Connecticut, Florida, Georgia, Iowa, Massachusetts, Washington and New York) already have exempted the Internet from taxation.

The federal government may not be far behind. Last October, two U.S. House subcommittees approved legislation to place a six-year moratorium on any new state and local taxes on electronic commerce, including the Internet.

As the debate regarding Internet taxation heats up, federal legislators need to be able to separate fact from fiction. One of the myths put forth by opponents of Internet taxation is that 30,000 taxing jurisdictions could suffocate the Internet’s development.

That number is exaggerated. The fact is, Internet transactions take place one at a time and nearly always are taxable by the purchaser’s jurisdiction. The technology exists to track and record that information.

Opponents also fear that, since many states have different sales tax levels, small businesses would face a bookkeeping nightmare trying to determine the tax to levy on each sale. Small businesses, however, would collect sales taxes only on sales made in their home states. Only companies with operations in more than one state (generally larger firms) must collect taxes in each of the states in which they operate.

Clearly, the uncertainties, myths and complexities of this issue require careful examination by elected officials. At the Large Urban County Caucus held last November in Washington, D.C., the National Association of Counties passed a resolution opposing federal preemption of state and local taxing authority and establishment of an unlimited moratorium on state and local taxation of electronic commerce. NACo believes that such a moratorium would violate the long-standing constitutional principles of federalism and undermine the legitimacy of the partnership among the three levels of government.

In its resolution, NACo urged delay of federal legislation until a thorough and impartial national study is completed on the taxation of electronic commerce and its impact on local businesses and government. The study would include the following information:

* the amount of money consumers spend per year on the Internet. These figures would indicate the amount of tax dollars at stake for state and local governments;

* the number of businesses using electrical commerce broken down by year, as a means to determining how fast electronic commerce is growing; and * a survey of the types of businesses using the Internet to market their goods and services. This would help identify trends by determining where dollars are being spent.

NACo sees ensuring that citizens continue to receive the vital human services provided by local governments as one of its primary responsibilities. As electronic commerce continues to flourish, local governments must be in the forefront of the debate to make sure that their sales tax base is not decreased to the point of creating hardships for their communities.