WASHINGTON -- Utah Gov. Mike Leavitt spent much of last week in Washington touting his mother. He was proud that she had done all the Christmas shopping for her 29 grandchildren on the Internet.
''I have a confirmed Internet shopper at my house,'' he boasted repeatedly during four days of meetings, parties and work sessions at the annual winter convention of the nation's governors.
But it wasn't the $2,500 she paid for gifts that got his attention. It was the $400 in sales taxes he says she didn't pay that had him worried. Given the rapidly growing number of Internet purchasers, her buying illustrates the tax-loss headaches that the nation's governors, mayors and county executives face, a problem they're debating in their annual succession of Washington conventions. They look at the staggering growth of e-commerce and see government revenue being lost because, like Leavitt's mother, most Internet shoppers avoid paying sales taxes.
Sales taxes now represent 34 percent of the total revenues collected by state governments. Sales taxes also represent a substantial source of revenue for local governments.
But while online retail sales totaled $13 billion last year, sales taxes were collected on only 20 percent of transactions, according to Forrester Research Inc. of Cambridge, Mass. The problem of lost tax revenues will grow dramatically as online sales grow to $184 billion in 2004, the firm projected. In the words of Maryland Gov. Parris Glendening, the states face ''a very, very difficult situation. For some states, it's going to be a disaster. Then they'll either have to cut services massively or seek an alternate revenue source.''
But that was just part of the dilemma the governors took to the White House and to Congress last week. For as forcefully as Leavitt argued about the need to protect sales taxes as a source of revenue, governors from Virginia and California, and to some degree George Pataki of New York, all representing Internet business centers, warned against imposing any taxes that might stifle the evolution of electronic commerce and Internet transactions. ''I certainly don't want to kill the golden goose that is laying the golden egg,'' said California Gov. Gray Davis.
In their meetings with President Clinton and congressional leaders, the governors urged that the federal government not pre-empt the states. In resolving a related dispute over how to collect sales taxes on catalog purchases, the Supreme Court in 1992 barred states from taxing out-of-state catalog sales and directed Congress to define the commercial and tax marketplace. Congress responded with a moratorium on any Internet taxes that expires in October 2001.
Conflicting interests are apparent in competing plans advancing in Congress. With a bow to their conservative, free-market partisans, Sen. John McCain, R-Ariz., and Rep. John Kasich, R-Ohio, advocate making the moratorium permanent. But that is opposed by former governors-now-senators George Voinovich, R-Ohio, and Bob Graham, D-Fla. When it imposed the moratorium, Congress directed a task force to weigh the options and issue a final report next month. The commission includes representatives of private industry and local government and is chaired by Virginia Gov. Jim Gilmore.
There is no shortage of other disputes, including how and if to tax commercial transactions, how to collect any taxes that are levied and how to protect small business and large retailers against Internet-based merchants who are not charging sales taxes. ''What we're looking for is a level playing field for all those who sell,'' Leavitt said, a point of view Pataki conveyed during a meeting with Sen. Daniel Patrick Moynihan, D-N.Y.
Rep. Rick Lazio, R-N.Y., a member of the House Commerce Committee that must address the issue, says some form of extended moratorium is likely. ''Is it practical to do it (impose taxes) now when the technology is still evolving? It's better that we not do anything for a while.''
That has raised an even more profound question: ''Is the sales tax a viable tool in the 21st century?'' Leavitt asked. ''If it's not, we'd better get on with the discussion of what the alternatives are.''
Distributed by the Los Angeles Times-Washington Post News Service
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