Davis Says No for Now to Internet Purchase Tax


Former Gov. Pete Wilson struck a seemingly Republican-style blow for free enterprise last year when he opposed the National Governors Assn. by contending that states should not have the authority to tax commerce on the Internet.

Now, Gov. Gray Davis has done the same thing.

California’s new Democratic governor last week voted against a resolution on state Internet taxes that was approved overwhelmingly by his colleagues at an annual meeting of the nation’s governors in Washington, D.C.

“I don’t want to give any signal that the national governors are in favor of another tax,” Davis told his counterparts.


Davis, who is developing a reputation as a fiscal conservative, said the Internet’s enormous potential should evolve unfettered by government taxation. Aides said, however, that Davis is undecided about whether states should permanently be banned from taxing Internet commerce.

“We are in a sea change as it relates to interstate commerce,” Davis told reporters in Washington. “The Internet industry is in its infancy. The wiser course would be to wait three or four years.

“Gov. Wilson took a similar position,” he added.

The complex and politically dull issue of taxing sales made over the Internet is one only a bureaucrat could love. But there are billions of dollars potentially at stake for state government coffers.


Most governors fear that consumers will soon find the Internet to be the easiest, cheapest way to make purchases. As a result, they say, business will suffer at retail stores that now pay sales taxes to state and local governments.

Many companies do not charge sales tax to consumers making online purchases, or pay taxes on revenues from those sales.

Internet commerce has more than tripled annually in the last few years, growing from $3 billion in 1997 to an estimated $30 billion this year. Within a decade, governors predict, Internet sales will be worth hundreds of billions of dollars, perhaps up to $1 trillion.

They say state revenues for schools, roads, police, welfare and other government functions could suffer if states cede their taxing authority over Internet commerce.


“Is it fair for those who purchase from a store to subsidize those who purchase on the Internet?” asked Gov. Michael Leavitt, the Utah Republican who crafted the NGA resolution. “Is it fair to a store that has only a 5% [profit] margin to have to collect [a tax], but a person on the Internet doesn’t have to pay it? . . . That is an inequity that is just not going to be allowed to stand.”

The counter-argument is championed by Rep. Christopher Cox (R-Newport Beach), co-author of a bill President Clinton signed last year to impose a three-year moratorium on any new state taxes on Internet business. The bill also created a commission to study the issue.

Cox suggests that the benefits from a booming Internet economy will outweigh losses from sales taxes. For one thing, the new Internet companies will create jobs with tax-paying employees, he said.

“We make out far better from not being too greedy when it comes to the imposition of new taxes,” he said.


Cox added that the state’s authority cannot be stretched overseas, where the Internet also makes purchasing simple. And, he said, states now have the authority--although most don’t enforce it--to apply a “user tax” to their residents for out-of-state purchases.

California has such an unused law on its books.

Legally, any company that has a physical presence--like a store--in California is required to collect sales taxes from California purchasers and turn them over to the state.

Governors Offer Two Proposals


However, sales tax is not collected by most catalog companies--like L.L. Bean in Maine, for example--that do not have stores in California but still sell products to its residents.

In those cases, a California buyer is technically required to declare the purchase to the state and pay a user tax. But the requirement is never enforced, state officials said.

Like the catalog companies, most Internet sellers do not have a facility in the same state as their buyers, leaving state governments unable to enforce sales tax laws.

The lost taxes from catalog sales have never been substantial enough to raise an outcry from the states. With the anticipated Internet boom, however, most governors see much more at stake.


The solution proposed by the national governors follows two tracks: It would seek federal legislation allowing a state to require that out-of-state companies collect and pay state taxes. At the same time, it encouraged states to substantially simplify their tax systems.

Under the proposal, each state would adopt one tax rate to be shared by state and local governments. Now, sales taxes could be applied to purchases at several state and local levels.

But Davis cautions against moving too fast. “We’d be well advised to see what happens,” he told his colleagues, warning against any action that might “kill the golden goose.”