Untaxed cyber-sales spell other tax hikes, service cuts

State and local governments, Nevada included, will have to raise taxes or slash services if cyber-commerce continues to be sales-tax-free.

A new study by the University of Tennessee for the National Tax Journal projects that states and localities will lose $20 billion a year by 2003 in sales tax collections if e-commerce transactions continue to go untaxed. That's a tenfold increase over what foregone Internet taxes cost last year.

Professors William Fox and Donald Bruce, the study's authors, note that only the five states with no general sales taxes would escape unhurt if Internet sales continue to be untaxed indefinitely: The no-sales-tax states are Alaska, Delaware, Montana, New Hampshire and Oregon.

Other states would have to raise taxes on in-state sales from brick-and-mortar stores, raise other taxes or slash services to make up the difference, according to the study. Hardest hit would be:

- California, Illinois, New York, Tennessee, Texas and Washington. All would have to hike their existing sales tax by 0.75 cents on the dollar to make up the loss.

- Alabama, Arkansas, Minnesota, Mississippi, Nevada and Oklahoma would feel the pinch only a little less. Their loss would require a 0.6-cents-on-the-dollar sales tax increase.

''Congressmen are allowing their home-state economies to be hurt by this,'' said Fox. ''E-commerce is an incredibly important advance, but if what we have is people doing retail or wholesale business on the Internet because of a special tax advantage, they're distorting the economy, not helping the economy.''

Federal law and a Supreme Court ruling limit the ability of states to tax Internet sales.

In 1992, the Supreme Court said states can collect sales taxes from out-of-state vendors only if the retailer has an outlet in that state and could start imposing sales taxes on goods shipped to out-of-state buyers only if Congress gave its OK. The case dealt with mail-order catalog sales that now total 10 times what e-commerce amounts to, although Internet sales are projected to explode in coming years.

In 1998 Congress passed a three-year-moratorium on states taxing monthly Internet service fees by providers like America Online. The moratorium expires in October, 2001, by which time an 19-member Advisory Commission on Electronic Commerce is supposed to decide whether states and localities should be allowed to impose sales taxes on Internet purchases, whether they're from in- or out-of-state.

Republican Sen. John McCain of Arizona, the presidential hopeful, wants to bar taxes for good on Internet sales, including sales by in-state merchants, while the other presidential candidates favor continuing the moratorium on taxing monthly service fees.

McCain argues that that cyber-sales should never be taxed so these people that are making huge and massive investments in the Internet will have the confidence that it won't be taxed. He calls the Internet ''the engine of America's economy'' and says governors and mayors should understand that and ''get their greedy hands off of it so that the American economy can grow.''

The other presidential candidates - Texas Republican Gov. George W. Bush, Vice President Al Gore and former Democratic Sen. Bill Bradley of New Jersey - are awaiting a report from the advisory commission, due April 21, before taking a stand on taxing Internet sales.

But Gore and Bradley add that they are committed to a solution that protects state revenues and local retailers.

Grover Norquist, president of Americans for Tax Reform and one of the 19 commission members, predicts state and local officials won't like the commission results when 12 commission members must agree on any recommendation.

Eight commission members who represent cyber-business interests, for instance, have served notice they won't approve taxing anything that can be down-loaded from the Internet.

In the interim, more than a dozen states are looking at entering an interstate agreement that would let them collect Internet sales taxes from each other.

(James W. Brosnan is a reporter for Scripps Howard News Service. Email BrosnanJ(at)shns.com)