Governors' E-Tax Proposal Draws Fire

The National Governors' Association (NGA) last week adopted a proposal pressuring Congress to allow states to tax Internet and mail-order sales even where merchants have no physical presence.

At press time, President Clinton was expected to call for a moratorium on new e-commerce taxation when he addresses a technology investors' conference in San Francisco.

Fledgling e-commerce would be particularly hard hit if Congress takes up the NGA's proposal, said Robert L. Smith Jr., president of, Silver Spring, MD, a trade association of 40 merchants selling online, including Eddie Bauer, Barnes and Noble, 1-800-Flowers and Virtual Vineyards.

“At well under 1 percent of total [offline] retail sales, it's too soon to start talking about taxing commerce on the Net,” Smith said. “It's in the interest of all the states to see this medium grow.”

Rather than considering new ways to tax out-of-state merchants, Smith said, “states should be thinking of ways to attract them. On the Web, location is irrelevant and you can do as well [physically located] in Montana as you can in New York.”

Coinciding with the NGA's proposal, a statement released last week by John Shulte, chairman of the National Mail Order Association, Minneapolis, proposed a 2 percent tax on mail-order and Internet sales and the creation a single “tax clearing house” for all 50 states so merchants can write one check, say, quarterly to pay sales taxes. A vocal opponent of any new sales taxes, Shulte said a central collection and disbursement body would be an essential compromise.

“Otherwise, what happens when you make one $20 sale to Hawaii in a quarter?” he asked. “The administration costs to write the check would be more than the check itself.”

Shulte said companies with less than $2.5 million in annual sales should be exempt from collecting state sales taxes.

“They have enough to do just trying to grab market share,” he said.

The mail-order association makes up 1,000 companies with sales of $25 million or less, 30 percent of which are start-ups.

Harley Duncan, executive director of the Federation of Tax Administrators, Washington, an association of state tax-collection agencies, said the clearing house idea is rapidly gaining ground with his group.

“I think the states realize that we are all in this together, and we have to make [sales tax remittance] as simple as possible to administer if we are ever going to collect,” Duncan said.

As for electronic selling's fledgling status, he said, “It's important that we set the ground rules for electronic commerce early.”

Jerry Cerasale, senior vice president of government issues at the Direct Marketing Association, called the NGA's proposal archaic.

“They're trying to get a 19th-century tax system applied to 21st-century commerce,” he said. “We also think the governors are trying to take this opportunity to get rid of nexus [physical-presence laws allowing mail-order marketers to avoid collecting sales taxes] and go back and get catalogers.”

In the last session of its midwinter meeting, the NGA adopted a resolution urging Congress to allow states to require Internet and mail-order merchants to collect and pay sales taxes even if they don't have a physical presence in the state to which the goods are shipped. In return, the governors pledged to simplify the collection and payment process by enacting a uniform rate within each state. Two states, Virginia and California, objected to the resolution.

In a statement released by the NGA, Ohio Governor George Voinovich called the proposal “a workable compromise for business and members of congress.”

The NGA's proposal runs counter to parallel bills introduced by Rep. Christopher Cox (R-CA) and Sen. Ron Wyden that would allow states to tax Internet purchases only if the merchant had a physical presence in the state.

In the NGA release, Voinovich called the bills a “broad pre-emption that would seriously erode states' abilities to provide [public] services.”

Both bills are awaiting votes.

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