U.S. Governors Blast Final E-Tax Report

In a rare show of bipartisan unity, 42 U.S. governors attacked the final report of the Advisory Commission on Electronic Commerce (ACEC) Wednesday in a scathing letter to Congress. The governors say that if accepted, the recommendations would have the potential to reduce state and local tax revenues by more than $30 billion (US$) per year.

The letter came just one day after the American Electronics Association (AEA) attempted to preempt the debate by offering recommendations that counter the ACEC proposal.

“The stakes involving taxation of electronic commerce are remarkably high,” said AEA president and CEO William T. Archey. “Perhaps no other policy issue can do more to further electronic commerce’s growth if handled properly; or do more to impede that growth if handled improperly.”

Among the most hotly debated issues addressed in the ACEC report are its recommendations to extend the current Internet tax moratorium and to permanently prohibit states from taxing Internet access.

Governor James Gilmore (R-Virginia) chaired the Commission through months of stormy meetings in which contentious factions failed to reach a two-thirds majority.

Although he has long been an outspoken proponent of a tax-free Internet, Gilmore said, “I remained uncommitted through two meetings of the Commission and listened to both sides. In the end, my fundamental belief in the Internet to empower citizens as consumers and entrepreneurs and the failure of pro-tax advocates to demonstrate a real need for additional tax revenues led me to conclude that the Internet should remain tax free.”

Partisan Perspectives

Republican leaders say the proposals will afford needed tax relief for millions of middle-class Americans, preserve the technology-driven economic boom, and enable more people to gain access to the Internet.

Democrats urge caution — claiming that if one segment of the economy is exempt from taxation, taxes will have to be raised in another.

House Majority Leader Dick Armey (R-Texas) said, “The bottom line is: we’re going to keep the Internet tax free.”

However, Senate Commerce Committee Chairman John McCain (R-Arizona) canceled a vote planned for Thursday on his proposal to extend the Internet tax moratorium for five years.

The ACEC Recommendations

The 19-member Congressional tax commission, made up of both governmental and industry leaders, voted 11 to 8 to accept the final report, falling short of the two-thirds required to make a formal recommendation to Congress.

However, some of its recommendations did receive two-thirds of the required votes, including proposals to reduce the so-called digital divide, and to explore Internet privacy issues as they relate to taxation.

The controversial proposal to extend the current moratorium on Internet sales taxes for five years was one of the items that did not get the required two-thirds majority approval.

Also failing to win a two-thirds vote were recommendations to eliminate the three percent excise tax on communications, to enact a permanent ban on Internet access taxes, and also to reclassify as permanent the World Trade Organization’s current moratorium on tariffs and duties for electronic transmissions.

Riled Governors

The governors’ letter warns that special interest loopholes in the ACEC proposal would “force either reductions in education, transportation, and public safety programs, or offsetting revenue increases on every other taxpayer.”

The governors also decry the report as an attack on state sovereignty. “The U.S. Constitution was very clear in both ensuring state sovereignty and creating a critical balance between federal and state authority. For well over 200 years the federal government has respected state sovereignty and has been extremely careful not to interfere with the states’ ability to independently raise revenues. This proposal would dramatically undercut this precedent,” the letter reads.

Further, the governors are concerned that the report’s recommendations are unfair to local retailers because they would give online companies a major advantage. They believe that the ACEC proposals could “force thousands of small retailers in every small town across America into bankruptcy. ”

Digital Canyon

Rather than narrowing the digital divide, the letter says, the proposal will turn it into a canyon — by allowing high-income individuals with Internet access to buy tax-free goods online, while lower-income Americans without Internet access will be forced to continue buying locally, paying sales taxes.

Utah Governor and Chairman of The National Governors’ Association (NGA) Michael O. Leavitt said, “This report would wreak havoc on education in America because it would force states to make huge cuts in education budgets. Because elementary, secondary, and higher education spending represent 35 percent of the average state budget, virtually every state would be forced to make significant cuts in these programs. The result will be that fewer and fewer people will pay higher and higher taxes.”

The AEA’s Take

Rather than calling for a complete ban on Internet taxes, the AEA’s “guiding principles” call for the states and Congress to:

  • Impose no tax burden on electronic commerce greater than that imposed on traditional means of commerce
  • Support simplicity in administration
  • Retain and clarify nexus standards
  • Avoid new taxes on the Internet
  • Consider tax issues in a global context

The AEA document cautions Congress against simply extending the current Internet tax moratorium without “providing an overall comprehensive framework for simplification and nexus clarification.”

Its specific recommendations include permanently banning Internet access taxes and creating an environment favorable to true uniform simplification of the sales and use tax systems.

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