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Governors Agree to Support 3-Year Ban on Internet Taxes

By Rajiv Chandrasekaran
The Washington Post

The nation's governors agreed Thursday to support a three-year ban on special Internet commerce taxes in exchange for a promise by Congress to consider requiring electronic merchants to collect sales taxes after the moratorium.

The National Governors Association had opposed bipartisan legislation in the House and Senate to enact an Internet-tax moratorium, saying the freeze could deprive state and local governments of crucial tax revenue as electronic commerce becomes more popular. The governors' disapproval threatened to scuttle the bills, introduced by Rep. Christopher Cox (R-Calif.) and Sen. Ron Wyden (D-Ore.)

Industry groups contend that imposing sales taxes on Internet transactions will slow the growth of electronic commerce and make it less appealing to consumers.

After three months of negotiations with the governors' association, Cox agreed Thursday to revise his bill, reducing the moratorium from six years to three. Cox's bill also would set up a "Commission on Internet Commerce" that after the moratorium would propose a new system of levying state sales taxes on Internet and mail-order purchases.

The governors want to require Internet and mail-order merchants to collect sales taxes even if they do not have a physical presence in the state to which the goods are shipped. Currently, such businesses are not required to collect state sales taxes if they do not operate in the destination state; purchasers in 45 states and the District of Columbia, however, are required to send the appropriate sales tax to their state treasury, a rule that is largely flouted.

Because there are about 30,000 different tax jurisdictions nationwide, industry groups say that imposing a tax-collection requirement on merchants would create severe administrative burdens.

The governors want the commission to consider setting up a uniform national system of sales tax rules for electronic commerce and uniform rates for each state. By making those changes, they contend that the requirement would not be too cumbersome for merchants.

"Our goal is to ensure the system is fair," said Utah Gov. Mike Leavitt (R) who spearheaded the issue for the governors association. "A person should be taxed fairly no matter where the purchase is made."

Wyden said he would not support the compromise. "This creates a plan that's going to create tens of billions of dollars in new taxes that will clobber small businesses," he said in an interview.

President Clinton has expressed support for both a moratorium and a commission to study new approaches to taxing Internet commerce. Cox emphasized that recommendations by the commission, which will have business, consumer and federal government representatives but will be dominated with state and local representatives, will have to proceed through the standard legislative process. "It will only be proposed legislation," Cox said. "It puts the issue on the table."

Wyden and industry lobbyists also object to a provision in the Cox bill that would allow states and local government to keep existing taxes on Internet access service and commerce. "It guts the whole moratorium," said Jill Lesser, the deputy director for law and public policy at America Online Inc. "It says that if you rush to enact a tax, you win."