e-Commerce Update Jude Wanniski May 22, 2000

CORRECTION: The full House Ways and Means Committee will vote to repeal the 3% excise tax today and it will SOON be repealed by the full House. In Karen Kerrigan's report earlier today, she said the tax would be repealed by the House today.

A flurry of legislative activity on the Internet tax issue has taken center stage in the U.S. House this week: Yesterday, the House overwhelming approved an effort to block Internet access fees. Later this afternoon, the 3% telephone tax - a "temporary" tax instituted in 1898 to help pay for the Spanish-American War - will be repealed by the full House.

Meanwhile, Governor Mike Leavitt (R-Utah) was also in Washington, D.C. speaking at an Internet Tax conference - he spoke just prior to the access fee ban hitting the House floor. The Governor's trips to the nation's capital have been timed precisely to fall on the same day that these important votes are being considered. But (for the moment) his efforts, as well as those of the "brick-and-mortar" retail community, are losing their punch. Attempts to integrate language into federal legislation that chips away at legal protections granted to catalog and 800 sales - and thus extending to purchases made over the Internet - have decisively failed. (However, as noted in previous Polyconomics reports, state and local officials will still attempt to use the courts to test the "nexus" issue as it relates to electronic purchases.) Congress could address the nexus question and firmly establish rules-of-the-road for online taxation by codifying the U.S. Supreme Court's Quill decision as it relates to e-commerce - but at is not in the cards this year.

In attendance at Leavitt's speech on Tuesday, I noted a dramatic change in tone and message as the Governor articulated his position on Internet taxation. Perhaps the humbling experience of being forced into a primary by a GOP contender who spent a mere $3,000 to challenge the Governor to his seat has had some effect. The Governor's central point in his presentation was that "the states ought not to be preempted" and if states and localities can't be allowed to design their own plans then a "national solution" will be imposed by the feds to "level the playing field." In other words, state and local officials are not the bogeyman in this debate - this is "not about new taxes" stated the Governor. The federal government is the one to be feared, as the IRS would like nothing better than to seize this opportunity to collect taxes through a national scheme. The Governor also questioned the viability of the sales tax in the 21st century - "It may not be viable," he stated.

Behind the scenes, to be sure, the Governor is still working ferociously to stop any and all legislation that advances the cause for a tax-free Internet. Signs of the old Leavitt were still evident as he referred to online transactions as a "special privilege." Yet, for the moment, and possibly up until the he secures his state party's nomination in his bid for reelection, the Governor's pro-tax rhetoric was severely trimmed, which comes as welcome news to the anti-tax forces.