This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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If you followed the general media coverage of June's first meeting of the Congressional Advisory Commission on Electronic Commerce in Virginia, the impression you received was that taxing the Internet is a foregone conclusion. Well, not to rain on the parade of advocates of big government, but I am not sure I attended the same meeting.

I heard no groundswell of support among the majority of commission members to burden the Internet with myriad federal, state and local taxes. There was a spirited discussion about imposing use tax obligations on remote sellers, but this debate is as old as the mail order industry and is far from over.

First, it should be noted that not a single member of the advisory commission advocated taxing Internet access fees. In fact, exempting access fees from taxation seemed to enjoy wide support among commission members, including an America Online executive.

Nor did I sense support for the federal excise tax on telephone service (also known as the Gore tax) being extended to the Internet. The long distance carriers appeared more interested in repealing rather than expanding the federal excise tax. Excise tax revenues, unlike the use tax, go strictly to the federal treasury, which, given the current projected surpluses, does not appear in dire need of new revenues.

However, there were commissioners calling for Congress to overturn the Quill decision. These commissioners, led by Governor Michael Leavitt of Utah, advocated allowing states to impose a duty to collect and remit use tax obligations on out-of-state sellers who have no physical presence or nexus within the state as required by the U.S. Supreme Court in Quill. Before one writes Quill's obituary, it should be pointed out that Congress has spurned repeated attempts to abandon the physical presence requirement.

Rather than abandon Quill's nexus requirement, my solution is a national definition of nexus. Tax administrators and taxpayers agree that nexus is the major tax issue when conducting business over the Internet. Currently, what activities constitute nexus varies from jurisdiction to jurisdiction. Business as well as government needs predictability and "bright line" rules. A national definition with clear and unambiguous rules provides certainty to business and ease of administration for government.

The notion that state and local governments are currently losing out on vast sums of use tax obligations is an unsupported myth. A recent study conducted by Robert Cline and Thomas Neubig estimated uncollected sales and use tax in 1998 from the increase in remote sales due to the Internet is less than $170 million. Assuming California accounted for 20 percent of this loss of tax revenue, that amount would be a mere $40 million to a system that collected over $25 billion in tax revenue for 1998. But what the big government folks fail to realize is that by going after this $40 million in the case of California, they are putting in jeopardy an industry that brought billions of dollars in property tax and income tax revenues into California. They are literally going after the goose that laid the golden egg.

I will be introducing my proposal to create a bright line national definition of nexus at the second advisory commission meeting September 14-15 in New York City. At that point, the debate will not be over when Quill will be overturned but whether it should be codified in federal law.

Dean Andal, vice chair of the California Board of Equalization, is a member of the Congressional Advisory Commission on Electronic Commerce. This body, created by the Internet Tax Freedom Act of 1998, is to recommend options for the president and Congress when the three-year moratorium on new Internet taxes expires. The commission, besides its New York meeting September 14-15, is scheduled to meet December 14-15 in San Francisco and March 20-21 in Dallas.