March 2, 1998 Taxing I-commerce? Get real! A group of United States governors agreed last week to tax Internet commerce. In a resolution that's sure to provoke an outcry among I-commerce pioneers, the National Governors Association voted to approve a resolution recommending that each state adopt a single, statewide sales tax for all I-commerce purchases (see "U.S. governors support tax on Internet commerce," InfoWorld, Feb. 26, 1998). Now, this resolution is basically hot air. It has no direct legal impact -- it's up to the federal, state, and local governments to make the tax laws. Besides, only about a dozen governors were present when the vote took place. (Of those, only the governors of California and Virginia voted against the resolution.) But it does mark the beginning of what's bound to be a huge debate over Internet taxation. 30,000 tax jurisdictions? Until now, most of the political posturing on I-commerce has been staunchly against Internet taxes. President Clinton spoke out against Internet taxes last week (see "Clinton urges Internet tax-free zone," InfoWorld, Feb. 26). Last summer's White House report "A Framework for Global Electronic Commerce" recommended that the nations of the world declare the Internet a tariff-free zone, and that they impose "no new taxes" on I-commerce. (Does that phrase sound familiar?) In a similar vein, proposed bills now in the House (H.R. 1054) and the Senate (S. 442) would prevent state and local governments from imposing I-commerce taxes, at least until the federal government has a chance to study the matter. But the states' governors are concerned that they may lose valuable tax revenues if local businesses go online. In an effort to protect their budgets, they adopted the resolution calling for states to tax I-commerce sales. At the same time, the governors want to simplify online sales taxes. If every taxing authority imposed its own set of taxes on electronic transactions, I-commerce vendors would have to compute different tax rates for literally thousands of state, county, and city jurisdictions. The governors' resolution would restrict I-commerce taxing authority to the states, so vendors would have only 50 tax zones to consider -- a substantial improvement. Of course, local governments have similar concerns. The next time they meet, don't be surprised if the nation's mayors pass a resolution urging cities to apply local sales taxes to I-commerce. You can't blame governments for trying to protect their own slices of the tax pie, while trying to win favor with businesses and constituents by simplifying the system and by denying tax revenues to governments downstream from them. But this is hardly the way to produce a sensible, simple I-commerce tax scheme. Temporary restraining order So let's get realistic. Does it really make sense to impose new duties on this infant industry? I-commerce revenues amounted to about $7 billion in 1997, according to most estimates, making it a healthy industry -- but still just a drop in the bucket compared to the trillions of dollars in overall economic activity for the year. It's not robbing anybody's coffers yet. Besides, existing mail-order tax laws already apply to purchases made over the Internet. There's simply no good reason to change that now. Add new taxes, and many I-commerce companies will simply relocate to another city, state, or country. In time, I-commerce may grow to become a significant, even a dominating, part of our economy. When that happens, wrangling over how to tax it will really begin in earnest. But for now, it makes sense to leave I-commerce alone. That's why the House and Senate bills against Internet taxes are a good idea -- they'll put a temporary hold on I-commerce taxation and give everyone a chance to figure out what's really going on in the Internet economy. Want to read up on the topic? For more information on the President's Information Infrastructure Task Force and its position on I-commerce, including "A Framework for Global Electronic Commerce," see http://www.iitf.nist.gov/electronic_commerce.htm. The House and Senate bills against I-commerce taxes (H.R. 1054, sponsored by Rep. Christopher Cox of Newport Beach, Calif., and S. 442, sponsored by Sen. Ron Wyden of Oregon) can be found on the Internet at the Library of Congress' Thomas legislative information service, at http://thomas.loc.gov -- enter a search for "Internet tax" to find both. What do you think about Internet taxes? Write to me at dylan@infoworld.com. Dylan Tweney edits InfoWorld's Focus on I-commerce section online and in print. Missed a column? It's easy to catch up -- just click here.