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Taking Tax Matters Into Their Own Hands
The last meeting of the Advisory Commission on Electronic Commerce didn't turn out too differently than the first. There was still the political posturing, the aligning of state and local forces against the business coalition and the drawn out discussions on rules and procedures that have characterized the fractured panel since its inception. And while the real issue at hand, the taxation of Internet purchases, remains the same, the climate has changed.
States and localities originally had looked toward the commission to iron out some controversies surrounding the muddy issue of taxing goods purchased electronically. While some local organizations had launched a lawsuit to even-out the makeup of the commission, saying it was unlawfully weighted toward business interests, most observers expressed interest at analyzing the outcome of the commission's findings. But as meetings continued and attempts at compromise collapsed, many lawmakers moved forward with their own ideas in state legislatures nationwide.
The most uniform effort has come from the National Conference of State Legislatures, which has pushed legislation in 17 states calling for multistate meetings to implement a voluntary system of sales tax collection on out-of-state e-commerce sales. The American Legislative Exchange Council urged its members to introduce a model Internet taxation resolution calling for the indefinite continuation of the three-year federal moratorium on new and discriminatory Internet taxes. That model has been introduced in Iowa, and an Alabama legislator introduced his own measure expressing similar sentiment.
Some state lawmakers, however, have taken a unique approach and have introduced legislation changing the way goods are taxed, their state's revenues are collected or challenging some business practices. As the commission issues its lukewarm findings with no decision on the most contentious issues, some states are moving to clarify some of the most complex laws in the nation.
Eliminate The Negative
The argument from many state and local representatives has been that due to the increase in electronic sales that are not subject to sales tax, state coffers have and will continue to lose revenues. A recent University of Tennessee study estimates that e-commerce will cost state governments $20 billion in lost revenues in 2003. To eliminate that problem, Pennsylvania Rep. Frank Tulli Jr. has introduced legislation to eliminate the state's 6 percent sales tax. Tulli has said he wants to encourage technology and the Interrnet. He is opposed to collecting sales tax on e-commerce transactions, but notes that such a policy decision translates into lost revenue for the state. Pennsylvania's sales tax accounts for 34 percent of the state's tax revenue and nets approximately $6.5 billion annually.
Tulli's bill would recoup the loss by increasing Pennsylvania's income tax from 2.8 percent to 5.6 percent. Observers say the bill will remain stalled in committee, as more than doubling the income tax does not sit well with voters.
But Tulli's argument is that it will attract businesses and out-of-state shoppers to Pennsylvania and put it on the list of tech-friendly states while still having 29 other states with higher income taxes.
"Pennsylvania's strong economy may lead some people to question the need to act right away," Tulli said in a statement. "But with electronic commerce rapidly growing, the Commonwealth's inaction today may cause the loss of businesses and jobs tomorrow."
California Tackles Nebulous Nexus Issues
While Tulli's proposal is unique, more states are following the actions of the commission and looking at nexus as one way to alter their financial standing. Nexus, which is defined as having a tangible presence in a jurisdiction, is what determines whether an Internet company collects sales tax for a certain state. Companies with stores nationwide, such as Eddie Bauer, Macy's and Wal-Mart, collect sales tax in their physical stores and on their Internet sites due to their nexus in most states. But some traditional retailers have begun establishing e-commerce subsidiaries, adding ".com" to the end of their names, and arguing that they are different companies without nexus.
Two California lawmakers have introduced legislation that would force such companies to collect the sales tax. Assemblywomen Carole Migden, D-San Francisco, and Dion Aroner, D-Berkeley, argue that retailers who cross-promote and market their technically separate companies, such as book sellers Barnes and Noble and Borders, should be subject to the tax.
"If they're going to be a California retailer and sell products, be it online, through a fax or by a cash register, then they're subject to California law," said Migden spokesman Michael Miiller. "If they form an e-commerce subsidiary and sell that way, that's fine too. But that's not an exclusion from taxation."
The lawmakers argue it's an issue of fairness, both to those Main Street retailers who are required to pay sales taxes as well as those corporations who do collect the tax. "The whole retail industry in California is in support of this bill," Miiller said. "REI, Macy's, Wal Mart — who are operating in the same fashion — they're all paying their taxes. They're all trying to compete with a company that has a different interpretation of the law."
But as some Democrats work to collect the taxes, some legislators on the other side of the aisle are hoping to eliminate the entire sales tax system from the Internet. Sen. Ray Haynes, R-Riverside, and Assemblyman Steve Baldwin, R-La Mesa, have both introduced separate bills calling for the elimination of sales tax collection on Internet purchases.
"The bill simply says that Internet commerce is tax free as far as sales tax, whether it's in state or out of state," said Darrell Thomas, a Haynes spokesman. "It simplifies the nexus issue. In fact, the nexus issue is really irrelevant, and we've simplified it by stating that Internet commerce is not subject to sales tax."
But the likelihood of California passing such legislation is slim. Sen. Debra Bowen, D-Redondo Beach, said of Baldwin, "he's an extreme conservative, so that should give you an idea of that bill's chance of passing in a state with two heavily Democratic chambers."
- by Stephanie Lash
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