Internet Tax Ball Now in Governors’ Court

U.S. President Bill Clinton is apparently pushing governors to reach a compromise position on Internet taxation that would link a moratorium on taxation with a plan for states to simplify their sales tax structures.

White House press secretary Joe Lockhart reportedly said yesterday that Clinton told a small group of the nation’s governors that federal and state governments must work out the Internet taxation issue together — and urged that they do it quickly.

Governors Want Sales Tax

While there is strong sentiment at the federal level for a ban on Internet sales taxes, many governors are diametrically opposed to such a ban. The fear is that the increasing popularity of online shopping will quickly harm local brick-and-mortar sales, thereby eroding states’ tax bases.

At the meeting, Kentucky Governor Paul Patton said, “About 40 of 50 state governors feel very strongly that it is a problem that has the potential to undermine the sales tax as a source of state revenue.”

Currently, state governments have no authority to collect taxes on interstate sales, because the Supreme Court has deemed such taxation unconstitutional. The Court ruled that the states have implemented sales taxes in such a complicated manner that making a merchant collect them imposes an unreasonable burden on interstate commerce.

Under current U.S. law, states may tax intrastate sales by companies which have a physical presence in the state. However, this arrangement gives pure-play Internet e-tailers an advantage over brick-and-click companies that have both an Internet and physical presence.

Developing Compromise

Many analysts see Clinton’s discussion with members of the bipartisan National Governors’ Association (NGA) as a signal that a compromise between sides is developing, albeit slowly.

“The president has made it clear that he’s against access taxes for the Internet and against any discriminatory taxes for the Internet,” Lockhart said Monday.

Simplification of Sales Taxes

Lockhart gave a big hint as to where the compromise may lie by adding that a solution “may have to involve some simplification of sales taxes.” Such a simplification would resolve the Supreme Court’s ruling that such taxes are unconstitutional.

Such a proposal also seems to be in general harmony with the thinking of Virginia Governor James Gilmore, the chairman of the sharply divided Advisory Commission on Electronic Commerce (ACEC). The ACEC was empowered by the U.S. Congress to issue a report on Internet taxation.

Gilmore has been one the strongest opponents of Internet taxation, which many observers attribute to the fact that his state houses e-commerce giant America Online. Over the past several weeks, Gilmore supposedly hinted and then quickly denied that he might accept something less than a permanent ban on e-commerce taxes.

Where the Compromise Seems Headed

Under the supposed compromise proposal, the tax panel would ask Congress to pass a five-year ban on sales taxes on e-commerce and then ask states to pass legislation that would simplify their tax structures. At the end of five years, Congress would then consider granting the states the authority to tax online sales.

This proposal differs slightly from a proposal advanced earlier this month by representatives of AOL, Charles Schwab Corp. and other e-commerce powerhouses. That plan called for a five-year moratorium on tax measures, but said nothing about states simplifying their tax structures.