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Fighting Internet taxes to the end

Outgoing Virginia governor James Gilmore, an influential figure in the Internet tax debate, is knocking heads with fellow governors over the issue. But he's ready to rumble.

9 min read
Virginia Gov. James Gilmore may be about to ride off into the sunset, but he's still taking aim at Internet taxes.

Gilmore, who this month will step down as chair of the Republican National Party and leave office as governor, has long been a proponent of keeping the Internet tax-free. As chairman of the Advisory Commission on Electronic Commerce, Gilmore led a faction that resisted efforts to recommend any kind of Internet taxes to Congress, even though the stance prevented the commission from reaching any kind of consensus.

More recently, Gilmore stepped into the Capitol Hill debate over whether to extend the Internet Tax Freedom Act. Going against many other governors and state leaders, Gilmore advocated that Congress extend the moratorium without worrying about whether states could tax Internet sales.

CNET News.com spoke with Gov. Gilmore about the evolving issue of Internet taxation and his views concerning the proper boundary between individual freedoms and governmental authority.

Q: Why should the Internet, in general, and e-commerce specifically, be exempt from taxes?
A: Several reasons. One is a philosophy that we should be empowering individual people through the use of this new medium to the greatest possible extent. And when you begin to put in extensive sales-tax programs and extensive taxing programs like the VAT tax in the European Union and other taxing efforts, what you are doing is depriving small people out there from being empowered and using the Internet in order to improve their quality of life and (from being empowered) both as consumers and thinkers and as individuals.

My philosophy is that this is a brand-new medium for the 21st century, which has the possibility of really empowering people educationally and commercially. And we should be striving for that goal, as opposed to trying to find ways to enrich government more, because there's no limit to the amount of riches that government wants.

The opportunities and benefits of a strengthened Internet industry outweigh any type of theoretical loss of revenue that there might be. You supported the extension of the Internet Tax Moratorium that President Bush recently signed. Was it extended for a long enough period?
No, of course not. The longer you go on this, the more the benefits of an open-market opportunity present themselves, and the more certainty is built into the system. But still, putting forward some furtherance of the moratorium is better than where we were before with an expiration of the moratorium. Governments may very well have rushed in to do a patchwork taxation all across the country, adding increased burdens on the Internet and on individual people who are using the Internet.

Many of your fellow Republicans, led by Gov. Mike Leavitt of Utah, say that it's important for states to be able to tax the Internet and e-commerce because states will need that revenue eventually. They say that carving out an exception for e-commerce is both unfair and hurts local retailers. Why are they wrong?
I'm very respectful of the way they feel and I understand that. In a time of recession, of course, it's something you have to keep an eye on. But the truth of the matter is that the opportunities and benefits of a strengthened Internet industry outweigh any type of theoretical loss of revenue that there might be.

What we're really seeing here is an opportunity to build up an industry that is going to hire more people, create more capital investment and more opportunities. The exchange of free information, though, is the most important point: the opportunity for people to utilize this as a commercial tool as well as a philosophical and intellectual tool and an educational tool, and to build up this industry and not put burdens on it that would weight it down in return for some theoretical gaining of some type of retail taxation opportunity.

Do you support any kind of taxes on the Internet?
No, I think that it's clear that we should not be taxing Internet access. I

Gilmore on why other state leaders are wrong to want to tax Net sales.

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don't think we should be taxing downloaded products. And I don't think that we should be taxing retail either.

In terms of the taxation of individual products, the main point I'm coming to is there (are) still plenty of opportunities for the gaining of revenue through the growth of the industry, which will be tamped down by trying to tax people.

Doesn't that divide states into haves and have-nots? You've got a lot of states that don't have much high-tech industry and aren't going to benefit much from the industry's growth.
Well, they should have it, and I think that you are going to see that all 50 states begin to develop these industries more and more. And that should be their goal, instead of simply trying to tax individual citizens, not just of their own state, but of other states as well. They should be working to build up that industry within their individual states.

Is there a point at which the Internet will be big enough that you might support taxes on it?
No, I don't foresee that time. Because, again, the freedom and empowerment of individuals is a value that should never go away. You should always be seeking to make individual people freer people. You should always be seeking to make individual people more enabled and educated and to put more money back into the pockets of working men and women of this country. That is not a temporary value. That is a permanent value. So, the goal there should be to find other ways to build up this industry and not put burdens on the industry.

But Leavitt and others argue that this isn't about new taxes. States already have in place sales and use taxes. Are you saying that they are not entitled to their share of e-commerce sales?
I think they are entitled, through use taxes, if they have, in fact, passed a use tax. They really ought to be focusing more on their own individual citizens and having them pay the use taxes. Now, actually, I advocate that use taxes should be eliminated. The actual collection of use taxes is small, relative to all other taxation that states and the federal government take in.

It's not much money. And they could do without that money and just eliminate the use tax altogether and further free individuals. But that hasn't, of course, occurred yet. In any case, what I would caution against is constant efforts to impose use taxes upon individual citizens.

The European Union is moving toward requiring companies located outside of its borders, especially those in the United States, to collect taxes on digital downloads. What do you think about that? Is that something that the U.S. government should try to block?
This is very draconian. It is tamping down commerce. It raises the specter of Internet sellers across the rest of the world being discriminated against and not having the opportunity to take advantage of their own national philosophy and system of government. And I certainly hope that the European Union doesn't go that way.

I think that it's clear that we should not be taxing Internet access. I don't think we should be taxing downloaded products. And I don't think that we should be taxing retail either. In order to even achieve it, you would have to try to track down people as to what their location is, what their private business is in order to force people beyond their jurisdictions to collect and remit taxes. And that's bad policy.

Big, traditional businesses have begun to dominate the Internet and e-commerce. If Wal-Mart is expected to collect a tax in its brick-and-mortar stores, why shouldn't Wal-Mart be expected to collect a tax when it sells online?
Because (what) we are trying to do here is to benefit remote purchasers and thereby increase the system and also benefit the individual people who are using the Internet. And it's not a matter of focusing on (a company) like Wal-Mart. It's a matter of focusing on the purchaser. And if a purchaser chooses to buy a remote good, from whatever location, then we are trying to benefit the working men and women of the country and individuals of the country who deserve an opportunity to engage in commerce with the least possible tax burden.

Because the Internet at this point is skewed toward higher income people, aren't you essentially giving a tax break for the wealthy?

Gilmore on the EU's plans to tax digital downloads.

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In the long run, it is unrealistic to think that only rich people are going to be utilizing the Internet for educational and for commercial and for retail purposes. The goal of the country ought to be to spread the benefit of the Internet as widely as possible. But one thing we know for sure, and that is that if you impose taxes on either access or downloaded products or even on traditional retail, you will discourage people who have the least money to spend from utilizing the Internet.

Leavitt and others are pushing to simplify the state sales tax systems to decrease the burden on sellers. What do you think of those efforts?
As a practical matter, it's extremely difficult to put together a system to do something like that without putting such burdens on small entrepreneurs that they're not able to comply. And that also goes for the European Union. If the European Union demands that all companies that are going to sell within their marketplace become, essentially, European companies and register, it's OK for a large retailer. They can probably handle those burdens, hire lawyers, meet those regulations and pay those kinds of burdens. But for the small entrepreneur, that is going to be very, very difficult.

Even within the confines of the United States and its market, the small entrepreneurs (are) going to have a terrific burden that is going to be placed upon them as they try to comply. And that's not good. We want to use the Internet...to increase entrepreneurship and increase the opportunities for small-business (owners).

Many companies say they have produced software to calculate sales taxes nationwide, easing the burden for online sellers. Why not count on a technological fix to this problem?
I don't think that any real software has been (shown) to work. When you're dealing with different sovereign entities defining products in different ways, changing the rules almost on a daily basis and having entirely different taxing philosophies based upon their sovereign entity, then the software company is dealing with an unmanageable situation that changes every day. The bottom line is that it hasn't been demonstrated yet that you can technically do it.

Even if you could technically do it, you're still discussing placing a burden on individual working men and women who are trying to use the Internet who are suffering the detriments of doing online purchasing and yet, at the same time, being also asked to pay the same kind of tax that they would pay when in a much more convenient retail setting.

Gov. Leavitt argues that by banning taxes on items such as e-commerce or the Internet you're forcing states to charge higher taxes on items that are

Gilmore on why keeping the Net tax free is not a tax break for the rich.

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taxable. Leavitt argues that taxes should be on the broadest base possible so that they can be as low as possible. What's wrong with that argument?
We make policy decisions every day about items that we're not going to tax and we're going to leave free because we want to encourage that kind of activity and things that we want to tax because we choose to do that in order to increase essential revenue.

It's an oversimplification to suggest that somehow some philosophical decision ought to be passed that says there should be the maximum possible taxation or the maximum possible ways of taxing. That's a rather breathtaking statement to make.

Virginia is the home of a number of high-tech companies, including America Online. To what extent is your outspokenness on the Internet taxation issue an advocacy on behalf of these companies?
It is not in any way an advocacy on behalf of any of these companies and I don't think anybody could point to anything like that. The policies that I am suggesting here are good for the entire 50 states and more importantly than that, good for the citizens of all 50 states. Because my emphasis is not on individual businesses. They're not paying the tax. The people of the United States are paying the tax.