Virginia Gov. James S. Gilmore III (R), the chairman of a congressionally appointed commission that is trying to hammer out a tax policy for the booming and largely unregulated world of online commerce, yesterday urged the group to recommend that Internet purchases be exempt from sales taxes.
Gilmore's proposal also calls for the repeal of a federal excise tax on local and long-distance telephone service--which he said would save consumers more than $3.3 billion a year--and for states to be free to spend welfare money on computers and Internet access for poor people.
"Electronic commerce is a driving force of our economy," Gilmore said in an interview yesterday. "We shouldn't slow it down with taxes."
Gilmore's plan, which follows on his politically popular efforts to eliminate Virginia's property tax on cars and trucks, likely will add a new and controversial twist to the deliberations of the Advisory Commission on Electronic Commerce. Several members of the group, set up last year by Congress when it enacted a three-year moratorium on Internet taxes, had been leaning toward ways to impose levies on electronic purchases similar to those placed on goods bought from traditional retailers.
Those who support taxing Internet commerce include many state and local government officials, who worry that the proliferation of tax-free online shopping will put Main Street merchants at a disadvantage and deprive localities of much-needed revenue. But business leaders and politicians who represent states with a high concentration of Internet merchants--among them Virginia and California--argue that the lack of aggressive tax collection on electronic commerce has been a big reason for the recent boom in online shopping, which, they argue, has helped to fuel the country's recent economic boom.
Imposing taxes will "discourage" e-commerce, Gilmore said. "It's not a policy we should be following."
Members of the commission who represent local governments and other states took a dimmer view of Gilmore's proposal. "There are real questions of fairness here," Dallas Mayor Ron Kirk said. "How are we going to replace this revenue?"
Although electronic commerce represents only a fraction of retail activity, industry analysts expect it to mushroom in coming years. One study, conducted by consulting firm Ernst & Young, estimates that online transactions will account for about 10 percent of all retail sales--between $230 billion and $250 billion--by 2002.
Utah Gov. Mike Leavitt (R), the chairman of the National Governors' Association and a member of the commission, also criticized Gilmore's approach. "The interest of the states is to ensure that every American is treated equally and that taxation is based on if they buy, not where they buy and where they sell," Leavitt said.
The governors group plans to unveil an Internet tax proposal next week and submit it to the commission. Under its plan, existing sales taxes would be applied to electronic commerce but participation by merchants would be voluntary. The states would arrange for third-party clearinghouses, compensated by a fraction of the tax revenue, to help merchants collect the taxes and to distribute the payments to the state treasuries.
Under current law, a state or local government cannot require businesses without a physical presence within its borders to collect sales taxes; in 46 states, purchasers are supposed to pay the tax directly to state governments, but the vast majority of people do not.
Although officials with the governors association acknowledge that many merchants may not participate in a voluntary plan, they note that numerous other businesses that have both a Web site and multiple physical locations--a growing trend in the e-commerce industry that has been dubbed "clicks and mortar"--would be attracted to the simplified nature of the new system, which includes an exemption from certain tax audits.
Gilmore previously had expressed doubts about taxing e-commerce, but yesterday's proposal was the first time he has come out firmly against the idea. His plan was released a day before another GOP leader, Rep. John R. Kasich of Ohio, plans to announce his own legislation banning Internet taxes.
Kasich, the chairman of the House Budget Committee, said his legislation is not intended as an end-run around Gilmore's commission, but he said he worried that the group might strike a compromise that would not fully protect electronic commerce from taxes.
Gilmore's plan also calls for the current 3 percent excise tax on telecommunications services, which was imposed in 1898 to pay for the Spanish-American War, to be reduced to 1 percent. After three years, the tax would be fully abolished. At that time, $1.7 billion of federal money would be divided among states to compensate them for any tax revenue lost to electronic commerce, Gilmore said.