Foes of Internet taxes warned on Wednesday that attempts to levy fees on online purchases would cripple an already faltering U.S. economy.
"The plunge in the Nasdaq," said Sen. John McCain (R-Ariz.), "is a clear sign that we need to be mindful of the economic effects of our tax policy decisions as we move forward on this issue."
McCain, chairman of the Senate Commerce committee, said during a hearing that the Nasdaq's (Nasdaq Composite Index) dizzying descent -- it fell another 2 percent on Wednesday to close at 1,972 -- meant Congress should extend restrictions that bar state governments from levying taxes on some Internet transactions. The current moratorium expires this fall.
"Some dot-coms that were once the toast of Wall Street are now auctioning off the remains of their companies, and the imagined threat to traditional brick-and-mortar stores has all but disappeared," said Jane Swift, the lieutenant governor of Massachusetts, which is home to a clutch of tech firms near Boston. "It would be a mistake to drive remaining businesses out of business through added taxes we don't need."
Swift said that in her state, Internet sales have had a "nearly insignificant" impact on the revenues of traditional, meatspace retailers.
Groups like the National Association of Counties, the U.S. Conference of Mayors, and the National Governors Association (NGA), have lobbied the commission, advocating the implementation of Internet sales tax revenues.
Jim Geringer, the Republican governor of Wyoming and an NGA representative, told the committee that "the argument that Internet-based fledgling businesses need to be nurtured is not a relevant argument. Electronic commerce has become a mature and important part of the U.S. and international economy."
Geringer said that if Congress extends the tax moratorium, it should also allow states that simplify their tax systems to require remote sellers -- such as Amazon (AMZN) or Lands End -- to charge taxes. Business advocates in the past have pointed to the dizzying number of different rules while arguing they should not have to collect taxes on shipments leaving their state.
The vast majority of states rely heavily on sales taxes for revenue, Geringer said, and thus face daunting losses from online commerce, possibly threatening the quality of local government services.
"Tax policy should not play favorites, whether between and among states or between and among economic activities," Geringer said. "Education, health and public safety issues should not be put at risk."
By the end of the hearing, it seemed more likely than not that Congress would approve some extension of the moratorium -- the only question left was what form it would take.
Even Peter Lowy of the e-Fairness Coalition, which represents traditional retailers, allowed that the moratorium should continue while states simplify their tax systems. That is, as long as states eventually gained the ability to tax.
"Requiring brick-and-mortar retailers to collect sales taxes while exempting their online competitors is fundamentally unfair," Lowy said.
Lowy said his coalition supported S.521, the Internet Tax Moratorium and Equity Act, introduced last week. Other bills currently pending would only extend the moratorium.
But some tax opponents doubt that such a simplification of the state tax system is even possible. Jeff Dircksen, testifying for the National Taxpayers Union, predicted that state and local governments could not reasonably sort out the issues involved in taxing e-commerce.
Pointing out that there are over 7,000 government entities -- states, cities, counties and other jurisdictions -- that impose sales or use taxes, Dircksen said: "The ensuing debate among these entities will make past attempts by the European Union to set standards for what constitutes marmalade, mayonnaise, or a cucumber seem like a pleasant tea party in comparison."
Dircksen also talked about the stock market slump: "In the last 12 months, the Nasdaq has fallen nearly 60 percent. The last thing that a slumping technology sector needs is higher taxes on the industry and its consumers."
In November 1999, the NGA proposed a plan designed to prompt online companies to charge sales taxes on a voluntary basis. A high-profile commission created by Congress deadlocked in its final report published in April 2000.
Ryan Sager in Washington contributed to this report.
