Battle lines tighten over taxing Internet commerce

Traditional retailers are joining forces with state and local government officials this week to try to prevent the Internet from evolving into a tax-free sales haven.

But they face an uphill battle in their effort to persuade a government board, the 19-member Advisory Commission on Electronic Commerce, to adopt their position. The commission is deeply divided on the issue, and so is the political world - though not along partisan lines.

It meets here Tuesday and Wednesday to hear from retailers and begin considering 37 proposals on taxation of Internet commerce.

Disagreeing with traditional retailers, the commission's chairman, Gov. Jim Gilmore, R-Va., advocates a permanent ban on Internet taxation, including sales taxes.

Gilmore and his allies - top Republican congressional leaders, most of the GOP's 2000 presidential candidates, much of the e-commerce industry and numerous anti-tax groups - argue that taxation would only slow economic growth by shackling the Internet.

On the other side is the National Governors Association - led by Republican Gov. Mike Leavitt of Utah, a commission member - as well as cities, counties and state legislatures that fear growing Internet commerce will erode the tax base needed to provide services.

Sales taxes are the single largest source of revenue for most states and local governments, amounting to $147 billion in 1997. And although e-commerce is only a fraction of total sales in the United States today, it is expected to go nowhere but up.

''I think the anti-tax forces have all the momentum going into this meeting,'' said Ron Nehring, director of national campaigns at Americans for Tax Reform. ''If there is going to be a consensus position, it will be the electronic freedom position.''

Joining the fray is a new group, the E-Fairness Coalition, which includes major national chains such as Wal-Mart Stores, Inc. - the nation's biggest retailer - and Radio Shack as well as smaller mom-and-pop stores.

Speaking for the coalition, Wal-Mart executive David Bullington said government has a ''duty'' to collect sales tax from Internet shoppers. Failing to do so is ''totally incorrect tax policy,'' he said.

The commission is supposed to send its recommendation to Congress in April. It is also grappling with questions such as international tariffs and banning Internet access taxes as well as sale taxes.

In most states, people are technically required to pay sales taxes on catalog and Internet purchases, but there is little enforcement and few do so voluntarily. A three-year ban on new Internet taxes passed by Congress last year has no impact on this, since sales taxes are not new.

But in 1992, the Supreme Court ruled that a state could not force a remote seller to collect and remit sales taxes unless it had a physical presence within that state. The justices said Congress would have to enact any change.

Leavitt and most of his fellow governors advocate a voluntary e-commerce sales tax system in which states would each eventually adopt a single rate - dozens of cities and counties now have their own rates - and a ''trusted third party'' would use computer software to collect and distribute the money based on location of the purchaser.

Aside from the revenue questions, many Republican governors say keeping sales taxes out of the Internet represents an unfair advantage.

''Government should not be in the business of picking favorites among competitive forces such as traditional retailers or emerging electronic retailers,'' said Gov. John Engler, R-Mich.

The Clinton administration opposes an outright ban on Internet sales taxes but says it is too soon to begin imposing a new tax system. The focus should first be on simplifying the multiple state systems, said a senior administration official speaking on condition of anonymity.

Finding compromise may be elusive, however. The e-commerce tax panel is likely to produce only a series of options, since a consensus position requires a two-thirds affirmative vote. And the Republican-led Congress has shown no appetite for helping states tax Internet sales.

''There are too many special interests and political interests to develop a large consensus right now,'' said David Lifson, tax chairman of the American Institute of Certified Public Accountants. ''Maybe the problem needs to get even worse. Then there will be the political support to do something.''