Internet Taxes--DowJones:>>>A Lobbying Machine Springs Up To Revive Issue Of Internet Taxes
dowjones.wsj.com
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Edited ad.
By GERALD F. SEIB and JIM VANDEHEI
Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- The road to a tax-free Internet looked smooth and clear in Congress. Then an oddball coalition of retailers, real-estate agents, firemen and teachers came along.
Just last month, the House rammed through a bill imposing a five-year moratorium on new Internet taxes, without even considering the devilish question of how to handle sales taxes on Internet commerce. Love of the Internet being this year's version of a motherhood issue, most expected the Senate to soon follow suit.
But the forces of cyberspace were in for a surprise. A broad collection of people who want sales taxes on the Internet suddenly materialized and succeeded in stalling the bill in the Senate. Senators may soon begin considering alternative bills that, while still blocking new Internet taxes, would take the first steps toward a uniform tax system under which Americans would pay for shopping in stores and on the Internet alike.
That turn of events can be explained in large measure by people such as Robert Benham. Mr. Benham, a trim and angular Midwesterner, owns an upscale women's fashion store in Oklahoma City. On a recent day, he sat at a government-issued wooden table in Washington, talking to Dan Barron, a fresh-faced aide to Sen. James Inhofe of Oklahoma.
For the umpteenth time in recent weeks, Mr. Benham, a former minor-league pitcher, let fly with his pitch: Failing to impose sales taxes on Internet purchases is patently unfair to stores such as his, which must charge sales taxes.
"We're not seeking a new tax" on the Internet, he said. "What we are seeking is a level playing field." Then he unleashed one of his most politically potent arguments in favor of balanced tax treatment for the bricks-and-mortar set: "We're the ones who sponsor the Little League teams, who buy tables at charity events, who hold fashion shows," he said. Quoting from one of the 300 letters he has sent Congress, he added: "When's the last time a dot-com did a charity fashion show in your district?"
Mr. Benham is part of a group dispatched by the National Retail Federation to deliver the same message at more than 60 similar meetings on Capitol Hill, including a session with Senate Majority Leader Trent Lott. Elsewhere, governors worry that the loss of sales-tax revenue could wreck their state budgets. The real-estate industry frets that, if sales-tax revenues wilt for states and cities, real-estate taxes will rise to make up the difference. Shopping-center developers figure they'll get hit with a double whammy: The stores in their centers will lose business to the Internet, and the centers will get whacked with higher property taxes.
The unions that represent state and local government workers and firefighters see their members' jobs going up in smoke if state and local revenue shrivels along with sales taxes. Both of the nation's main teachers' unions are worried about what declining sales-tax revenue will do to the quality of schools.
From all this angst, a lobbying machine has arisen in recent weeks to counter rhetoric about the joys of a tax-free Internet. The International Council of Shopping Centers has had its members send hundreds of letters to Congress. It commissioned a poll showing that 65% of Americans think it would be unfair to make stores but not Internet retailers collect sales taxes, and it helped sponsor newspaper ads in Washington making its case. Some of the groups worried about a taxfree Internet have formed the E-Fairness Coalition, which has been busy spreading the word around Washington.
One cog in the lobbying machine is Stanford Alexander, a real-estate developer in Texas. Mr. Alexander, chief executive officer of Weingarten Realty Investors, paid $18.6 million in property taxes last year on the 132 shopping centers he owns in Texas. If sales-tax revenue declines, Mr. Alexander fears that the Texas legislature will raise taxes on commercial property. That compelled him and other Texas businessmen to visit Washington three times in recent weeks to implore senators to rethink a permanent moratorium that fails to address how states collect sales taxes.
Mr. Alexander is part of a Texas triumvirate that has been lobbying hard on Capitol Hill. Tom Franks, a Beaumont retailer who sells $300 million of home appliances annually, fears consumers will eventually flock to the Internet to dodge Texas's 8.5% sales tax, an important source of revenue for a state with no income tax. He made this pitch to several lawmakers, including Republican Sen. Phil Gramm and Democratic Rep. Nick Lampson, but he left unsatisfied. One lawmaker suggested that he simply start a Web site outside Texas and ship the goods back in to save his customers the tax-an option several retailers are considering if Congress doesn't address the problem.
The third partner in this Texas lobbying effort is Malcolm Gillis, president of Rice University. Dr. Gillis is among 175 economists who have lobbied Congress to consider how education will suffer if states can't recover taxes on Internet sales. The group was instrumental in persuading Democratic Sen. Bob Graham, of Florida, and others to demand that any extension of an Internet-tax moratorium include a framework for a new collection system. The House-passed legislation presents a "serious problem," he said, because 45 states impose sales taxes and more than one-third of that revenue pays for educational programs.
At a minimum, this old-fashioned lobbying effort has slowed the train on Capitol Hill. Even Sen. John McCain, who fervently argued for a permanent moratorium on Internet taxes in this year's presidential primaries, is now having second thoughts. "We don't have an answer yet because this is an incredibly complex issue," concedes Mark Buse, a top adviser to Sen. McCain. "This has not been nearly fleshed out enough."
At this point, a reasonable guess is that the House and Senate now don't have enough time left to agree on any bill this year. That would leave in place an existing, short-term moratorium on new Internet taxes, which expires next year, and allow Congress to come back after the election to consider the problem at greater length, in calmer times.
In any case, Congress's role is crucial. While state governments impose and collect sales taxes, a plan for collecting them on the Internet isn't possible without some action by the federal government. That's because a Supreme Court ruling in 1992 held that states don't now have the power to collect taxes on out-of-state mail-order companies that sell into their states. In effect, the ruling said that states' power to collect sales taxes stops at their borders. If that is to change, Congress will have to pass legislation blessing a new system.
Everyone knows how sales taxes work, but few people realize that they are supposed to pay that same tax to their state government every time they buy a product outside the state's borders. This is called a "use tax."
For instance, if a person lives in New York and buys a stereo system in Connecticut -- either via the Internet or by mail -- he or she is required to keep the receipt and pay the home-state tax at year's end. Most states provide a line on annual tax forms to remit the tax. Few people pay this use tax, though, because most don't understand it, aren't aware it exists, or know states can't really enforce it. Most states don't bother to crack down, but this tax loophole could become a major problem as Internet sales proliferate.
Forrester Research, a company specializing in research on Internet topics, estimates that 17 million American households last year bought a total of $20 billion of goods. Both those figures are widely expected to grow sharply this year.
Initially, the Internet industry succeeded in convincing a large swath of the political world that this should remain a tax-free nirvana and got a sympathetic report on the issue from a government panel earlier this year. Republican leaders of the House, where each member faces re-election this year and campaign contributions from the high-tech industry have become an important force, fell in line with that view.
But in the Senate, where only a third of the members face re-election this year, the passions don't run so high. Senators have been more inclined to listen to governors panicky about losing sales-tax revenue. And senators have proven particularly sensitive to the argument that, without a new system to collect sales and use taxes, state education and law-enforcement programs could be drained as tax revenue dries up. That's why a bipartisan cadre of lawmakers, led by Democratic Sen. Byron Dorgan, of South Dakota, is demanding that Congress help states collect the same taxes on Internet sales they do on traditional transactions.
Sen. Dorgan's approach would require sellers to collect and remit the use tax at the point of sale, freeing consumers of their obligation. His legislation, which still would extend the moratorium on Internet use and access taxes for four years, would at the same time create a "compact" that states could enter to jointly collect and distribute sales taxes.
To eliminate the confusion caused by multiple state-tax laws, states would be required to adopt uniform definitions of all taxable products. For instance, potato chips are considered taxable snacks in some areas and tax-free food in others. More important, before entering the compact, a state would have to adopt a one-rate use tax. Currently, some states, such as New York, have numerous use-tax rates.
If 20 states enter the compact and complete the required changes, the new collection system would take effect -- unless Congress votes to disapprove of it. Sen. McCain, chairman of the Senate Commerce Committee, opposes that bill because it could lead to taxation without specific congressional approval. He is considering backing a compromise that takes a similar but much more vague approach to a new sales-tax system.
That is the legislative fray into which Mr. Benham, the retailer from Oklahoma City, is throwing himself. Mr. Benham has had a long career in retailing, but in 1991, yearning for a chance to run his own business, he and his wife, DeDe, bought an established women's apparel store in Oklahoma City called Balliet's. The threat to his core business from a tax-free Internet became clear to him, Mr. Benham says, on a recent day when a customer came in for a consultation at his store's cosmetics counter. After getting help picking out the correct makeup, Mr. Benham recalls, the customer stood up and declared: "I'm going to go home and order it from Beauty.com," an Internet cosmetics site.
So Mr. Benham decided to get active, working in tandem with the National Retail Federation. He wrote to Congress -- to the entire Oklahoma congressional delegation, to all the members of the Senate Commerce Committee, to all the members of the House Ways and Means Committee, to Sen. McCain. He followed up with 50 phone calls, and then with trips to Washington to make the case directly. His case has been bolstered by the fact that even some high-tech executives, notably Intel Corp. Chairman Andrew Grove, have said recently that Internet sales don't deserve exemption from taxes.
Perhaps most important, Mr. Benham helped cement the views of his local congressman, Republican Rep. Ernest Istook, that a tax-free Internet was unfair to conventional retailers. Rep. Istook is a rock-ribbed conservative who normally is drawn to any no-tax position. But he has become a force in arguing that a sales-tax-free Internet would simply compel governments to drive up other taxes, including federal taxes, which he fears will only enhance the power of Washington at the expense of states and cities.<<<
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