Governors Battle Over E-Taxation

The nation’s governors are deeply divided over whether e-commerce should be subjected to state sales taxes, as is the case with transactions in brick-and-mortar settings. What had been a quietly simmering disagreement has erupted in a public way in recent weeks.

Last month, an Internet tax panel chaired by Republican Virginia Gov. James Gilmore gave Congress a report recommending that a three-year moratorium on Internet taxation be extended five more years, until 2006.

Incensed by the Advisory Commission on Electronic Commerce’s report, 40 of the 50 governors dashed off protest letters to Congress. (Among those who did not write: Texas Gov. George Bush).

The missives essentially relay the same message: Not being able to tax the Internet will cost states at least billion annually and will imperil education funds. The letters politely, but firmly, ask the federal government to butt out of tax decisions best left to the states.

Along with Gilmore, governors who are outspokenly in favor of a tax-free Internet are fellow Republicans Paul Cellucci of Massachusetts, and Bill Owens of Colorado.

Among the more vocal foes of a tax-free Internet are Michigan’s John Engler and Utah’s Michael Leavitt, both Republicans. Leavitt was also a member of the ACEC panel.

Gilmore, whose state is home to scores of Internet businesses, including industry giant American Online, seems unfazed by the furor the ACEC’s report has generated among his fellow governors.

After studying the Internet taxation issue for 10 months, 11 members of Gilmore’s 19-member panel voted to extend a federal moratorium on Internet sales and use-taxes by five additional years. Codified in the Internet Tax Freedom Act, the current three-year moratorium expires in 2001. The ACEC also voted 11 to 8 to permanently ban Internet access taxes, and cast an identical 11 to 8 vote in favor of eliminating the federal telephone tax.

“It’s probably too soon to say exactly what the Congress will ultimately do,” Gilmore told Stateline.org. “But they seem to be quite anxious to adopt portions of the proposal of the E-commerce commission right away. There are discussions about additional bills being put in, both in the Senate and the House. We’ll just see what happens.”

Eighty percent of the country’s governors wasted little time mounting a counterattack to the ACEC report, which came out in mid-April. Thirty-six state chief executives signed a a two-page letter that was typed on National Governors’ Association letterhead and forwarded to U.S. senators Trent Lott and Thomas Daschle, as well as Rep. Dick Gephardt and House Speaker J. Dennis Hastert.

“We are writing to urge support for a fair and equitable system to ensure that all Main Street retail stores and Internet commerce can compete on a level playing field and to ensure that all Americans can join us in supporting the Internet as part of our new economy,” the letter begins.

“Unfortunately, the Advisory Commission on Electronic Commerce (ACEC) proposal that was included in the Internet Tax Freedom Act (ITFA) commission report, but failed to attain the two-thirds majority required by the Act, does the opposite.”

The missive was signed by the chief executives of Alaska, Arizona, Arkansas, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

In separate efforts, the governors of Alabama, North Dakota, New Mexico, South Carolina signed individual letters to Congress, expressing their misgivings about the ACEC’s recommendations.

“I believe the (ACEC) proposal represents an attempt by the federal government to take control of fiscal policy away from the states, and I strongly urge you to reject the report,” Alabama Gov. Don Siegelman wrote to Sen. Lott and House Speaker Hastert.

“While I support efforts to reduce taxes on our citizens, I believe this proposal usurps policy decisions traditionally made by the states,” South Carolina Gov. Jim Hodges wrote to Sen. Lott and House Speaker Hastert. “This would result in an inappropriate transfer of authority from state to federal government.”

If a recent poll taken in Michigan is any indication, public sentiment on Internet taxation may be more in sync with Gilmore and the ACEC than with the 40 governors who want e-commerce open to state taxation.

When 600 Michigan voters were polled by Lansing-based EPIC/MRA last month, 35 percent said they favored an Internet sales tax, 40 percent were opposed and 25 percent were undecided, the Detroit News reported.