Washington Outlook

Dallas Mayor Ron Kirk Urges House Panel to Reject Bill Endorsing Internet Commissionís Recommendations

By Larry Jones
May 29, 2000

Testifying before the House Judiciary Subcommittee on Commercial and Administrative Law on May 17, Dallas Mayor Ron Kirk urged members of the panel to oppose the Internet Tax Reform and Reduction Act (H.R. 4267), a bill containing many of the controversial recommendations submitted to Congress last April by the Advisory Commission on Electronic Commerce. Kirk told members of the panel "the vast majority of state and local officials are opposed to this legislation for one fundamental reason ó it will hinder our ability to carry out our public duties by preempting our historical right to determine tax bases and rates."

Although the bill is cosponsored by the bipartisan leadership of the committee and subcommittee, the Conference was told that the leadership is not wedded to the proposal. Their main purpose in introducing the proposal was to receive public comments on ACEC recommendations. In commenting on the proposal, Mayor Kirk said "we have very grave concerns about H.R. 4267, which seeks to codify most of the majority recommendations of our Commission." He pointed out the that the Commissionís report does not fairly reflect the full body of thought and analysis of all of its members.

Kirk, like most other state and local officials appointed to the Commission, was disappointed that the Commission Chairman, Virginia Governor James Gilmore, and a majority of the Commission members decided to issue a report that received less than the two-thirds votes required by law. "Our principal concern," Kirk said, "is that the majority report, while seen and passed off as a path way to tax reduction, is essential a path way for a complete avoidance of paying any sales and use taxes at the state and local level what so ever. And I think this is the greatest assault on state and local revenues in my recent memory."

Kirk said the Commission was able to reach consensus on several recommendations. Most of the Commissionís 19 government and business representatives agreed that the Internet should not be subjected to access taxes, and they reached consensus on closing the digital divide, protecting the privacy of merchants and consumers, and supporting the Administrationís position on keeping the Internet free from international tariffs. He explained that where the Commission had the greatest divergence was on the issue of fairness and equity of treating retail transactionsótreating goods bought and sold over the Internet the same as those bought on Main Street.

Noting the legal loopholes in our current laws that allows out-of-state merchants to avoid collecting sales taxes, Kirk said he does not believe the Commission report took seriously the negative impact that this drain is having on state and local revenues. He also noted that "some 45 states and District of Columbia rely on the sales tax as an integral of their revenue systems and in states like Texas, where we donít have an income tax, the sales tax can be as much as 50 to 60 percent of the stateís revenue."

According to Kirk, a government sanction tax free Internet would result in a very serious erosion of state and local governments ability to provide services that citizens depend on. "Whether we shop on the Internet, whether we buy on Main Street, all of us have the same needs. We want strong neighborhoods, we want public safety, good water, good schools and good roads. State and local governments have to have the ability to pay for these services. The legislation before you represent the most serious threat to our ability to do that," Kirk said.

Under the proposed legislation, a number of changes would be made that would significantly erode sales and use taxes. The bill calls for:

  • A permanent ban on all existing taxes on Internet access fees. Currently, there are 10 states and a number of cities in Colorado that would be affected at an estimated annual cost of $75 million.

  • A five-year extension of the current moratorium. The current three-year moratorium on multiple and discriminatory taxes, which is scheduled to end on October 21, 2001 would be extended to October 21, 2006.

  • A five- year moratorium on taxing digitized goods. During this period, state and local taxes on items such as books, magazines, movies, music and electronic games would be prohibited. This would apply both to digitized goods downloaded over the Internet and similar goods sold over the counter at local retail outlets.

  • Changes in the so called nexus rules. The nexus rules are the basis for determining when a merchant is obligated to collect state and local taxes. The proposal would create new loopholes in the nexus rules that would enable out-of-state (remote) merchants to use affiliates and Internet service providers in a local area to help market and service their goods with no obligation to collect state and local sales taxes.

  • A single tax rate per state. This would preempt local authority to impose a local option tax on remote sales. It also sets up dual rates for localities in states that allow varying local rates. Customers purchasing goods at a local retail outlet would be required to pay the current local rate, while customers purchasing goods from remote sellers would be required to pay the single rate, which most likely would be lower since it would be an average of the stateís rate and all of the local rates. Although the single rate would be lower than many local rates, it would mean a tax increase for people residing in areas that do not have a local sales tax. Currently these individuals pay only the state sales tax. If a single rate is adopted, they would be required like everyone else in the state to pay this rate on remote purchases. It would be higher because it an average of all rates in the state.

In an analysis conducted by the Federation of Tax Administrators, the tax breaks and new loopholes called for in the Commissionís report would cost an estimated $30 billion annually.

Gene N. Lebrun, a former South Dakota state legislator who also served on the Commission, joined Mayor Kirk in testifying against the Commissionís report. He urged support for a level playing field that would treat all sellersó local retailers and remote sellersó as fairly and uniformly as possible. To accomplish this goal, he said state and local governments are already in the process of radically streamlining and simplifying their sales and use tax systems.

Testifying in favor of the Commissionís report and the proposed legislation were Grover Norquist, president of American for Tax Reform, Stanley S. Sokul, a consultant with the Association for Interactive Media and Paul C. Harris, Sr., a Virginia state legislator. All served on the Commission. They argued that the recommendations in the Commission were need to protect the Internet from government officials eager tax this new commerce. Taxing the electronic commerce, they argued, would adversely affect its growth. They also urge members of the subcommittee not to give state and local governments the authority to require out-of-state merchants to collect their taxes. They claimed it would unduly burden interstate commerce. 

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