What's the difference between a book bought via the Internet and an identically priced one sold at a local store?
The store-bought book really costs about 6 percent more, or whatever is the amount of the local sales tax. That's because stores must collect it, but Internet sellers don't, if they are based outside the purchaser's state.Utah Gov. Mike Leavitt and Colorado Gov. Roy Romer told the National Press Club Friday that such loopholes could collapse the current sales tax system unless it is fixed.
And, of course, they just happen to have a plan - developed by Leavitt - to remedy the situation.
The two governors, on behalf of the National Association of Governors, called on Congress to allow states to tax all Internet sales to home-state customers, as long as states first simplify their collection systems.
That includes setting only one sales tax rate per state that Internet sellers would have to pay, resulting in 50 rates instead of the 6,000 that now exist because of varying levies in different counties, cities and special taxing districts.
Leavitt said that would allow software to be developed that would facilitate easy "seam-free" electronic payments by Internet sellers, as well as mail order companies that have also escaped sales tax to this point. Revenues would be directed to a third party that would distribute the money to states.
Another position of the governors is the prohibition of any taxes on access to the Internet, including taxes for Internet providers, byte taxes and bandwidth capacity taxes.
"There is the time in the life of every problem when it is big enough you can see it but small enough that it can still be solved," Leavitt said.
As sales via Internet become more popular in coming years, he said, political and economic turf battles would make it more difficult to address these issues.
For example, Romer said, larger items, such as the $100,000 tractors that his son's farm equipment dealership sells, could wind up often being sold via Internet by out-of-state competitors to escape what would be very large sales tax bills.
He said sales taxes, which provide states about half their revenue, "will not be able to survive if we have a discriminatory system that taxes some sellers, but not all sellers."
Leavitt said another possibility is that governments might be tempted to increase taxes on locally sold items to compensate for the loss of tax on Internet sales.
Romer also warned, "If we're not careful, we will begin to have a sales tax that is national and is collected by the Internal Revenue Service and redistributed to the states.
"And if that happens, you would have a fundamental shift in the balance of powers" between states and the federal government, with the federal government seizing more control.
Governors are worried that other bills in Congress, such as the Internet Tax Freedom Act pushed by Sen. Ron Wyden, D-Ore., and Rep. Chris Cox, R-Calif., would pre-empt states' sales tax authority.
But Leavitt said negotiations with these congressmen, congressional leaders and the Clinton administration have shown the various players all have the same goals - to allow tax-free access to the Internet while not eroding state taxing powers.
"I'm optimistic we will work something out," Leavitt said.