NACo, USCM sue over tax act

Local officials vow to block the spring meeting of a controversial federal Internet commission. They argue that Congress has stacked the Advisory Commission on Electronic Commerce with cyberspace business representatives who will advocate the prohibition of a local sales tax for Internet sales.

The commission is one outgrowth of the Internet Tax Freedom Act, which was passed by Congress last year to protect online businesses from local sales taxes. The legislation also calls for a Congressional commission to investigate how creation of a sales tax-free zone on the Internet would affect local communities.

In March, the National Association of Counties and the U.S. Conference of Mayors filed a joint lawsuit to stop the commission from meeting until more local officials are placed on its 19-member panel. (Currently, Dallas Mayor Ron Kirk is the commissions only local official.)

Representatives from NACo and USCM say they are concerned that online stores will drive Main Street merchants out of business, because cyber shoppers do not have to pay local sales tax when making purchases. Additionally, the loss of that critical tax revenue could mean the difference in hiring police officers or firefighters or scaling back services to residents, warns NACo President Betty Lou Ward.

We feel very strongly that, unless our voices are heard at the table when decisions are being made, we indeed will be the losers, says Ward, a Wake County, N.C., commissioner. She urges other local and state government organizations to join county officials and mayors in establishing a State and Local Government Task Force on Fair and Equitable Taxation. It would recommend to Congress and the president ways to simplify state and local sales taxes and restore fairness between local merchants and out-of-state retailers.

Billions of dollars are at stake for local communities, according to Sen. Bob Graham (DFla.) Writing in the Capitol Hill newspaper Roll Call, Graham says, Internet sales are expected to grow by about $500 billion in the next five years, and unless local governments are allowed to collect sales tax on these new sales they stand to lose about $17.5 billion.

Local government groups point out that the committees makeup violates the legislation, which mandates that there be eight lawmakers on the panel. Of the six lawmakers actually on the panel, five are state officials. Furthermore, local officials perceive nine of the commission members, including representatives from America Online and Netscape, to be pro-online business and anti-tax.

NACo Executive Director Larry Naake says he thinks the commission is tilted to the commercial side because Republicans and Democrats in Congress did not work together when forming it. They didnt talk to us, and they didnt talk to each other, he says.

Some members of Congress, however, are unapologetic. In January, Sen. Bob Smith (RN.H.) introduced legislation that would make the Act permanent. Imposing yet another layer of taxes in cyberspace is simply unfair, especially because many Internet shoppers already pay shipping or handling costs in addition to the purchase price of the goods they buy, Smith says.

Naake argues that online taxes would not be new taxes, and that denying local governments the ability to collect them would place an undue burden on cities and counties. Convinced that the current commission will be unfair to local governments, Naake says NACo will ask other organizations that monitor local and state issues in Washington to help pay for a private study investigating the Act.