Read My E-Mail, No New Taxes!

By Dean F. Andal

"The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." - President Ronald Reagan, White House Conference on Small Business, August 15, 1986.

President Reagan's observation about the aggressive mentality of government tax officials is sadly reflected in today's debate over the taxation of electronic commerce. Reacting to the growth in electronic commerce as a new revenue source and fearing the erosion of the existing tax base, state and local governments are needlessly threatening our nation's future economy.

It's not surprising that the growth in global network communications has spawned an almost frenzied interest in electronic commerce by government tax officials. The paradox is that while tax bureaucrats publicly argue novel interpretations of our laws in pursuit of electronic commerce, elected policy makers are scouring the nation promoting their states as "business friendly" to entice these very companies to relocate to their states. California is no different. While Governor Pete Wilson touts the state as a haven for the developing high-tech industry, our tax agencies are considered by some to be the most aggressive in the nation. Perhaps a basic civics class on the joys of representative democracy is in order.

There is simply no need for the states to expend resources in pursuit of electronic commerce. Not only will the technology prove a difficult tax target but the threat to the existing sales tax base isn't real. Despite the meteoric rise in electronic commerce over the past five years, traditional state sales tax revenues continue to grow.

For those of us who believe that government has become too big, wasteful and involved in our daily lives, we see no need for new taxes on electronic commerce. State and local governments should be seeking elimination of ineffective programs and reducing the scope of their activity. Congress is focusing on reducing government largess and reversing the 60-year trend of expansion. Why then tax the Internet job machine for additional tax revenue?

To ensure that the Internet and electronic commerce continue to grow unimpeded by government taxation, Congress must take affirmative steps to do the following:

• Prohibit state and local governments from imposing any taxes on access to the Internet.
• Prevent state and local governments from imposing any taxes on electronically delivered goods and services.
• Clearly define nexus to require actual physical presence by the merchant before a state can impose use tax collection and remittance requirements. Congress should include specific language establishing that Internet activity and contracts for services are insufficient to establish nexus.

A congressional act is necessary both for purposes of uniformity and because the states are simply incapable of resolving these issues among themselves. The global implications of electronic commerce raise just the type of dilemma the Founding Fathers envisioned being resolved by Congress. Our failure to do anything will perpetuate the confusion among merchants and service providers threatening this emerging market, not to mention the squandering of millions of taxpayer dollars in litigation that ultimately will fail to contribute to the certainty of the tax law.

Dean F. Andal is a member of the State Board of Equalization. He also has served in the California State Assembly. This commentary is based on his scheduled April 5 presentation to the Spring Symposium on Multi-jurisdictional Taxation of Electronic Commerce with the International Tax Program and the Society for Law and Tax Policy at Harvard School of Law.

(DeanAndal@CompuServe.com)