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Leading the charge on Internet taxation

An influential voice in the Internet tax debate, Utah Gov. Mike Leavitt says the issue boils down to a matter of fairness--and, he says, the states deserve their fair share.

10 min read
Mike Leavitt may seem a strange choice to cast as the Internet tax man.

The Republican governor of Utah has cut taxes repeatedly in his state. But Leavitt has been outspoken about allowing states to collect taxes on e-commerce sales.

The Supreme Court banned states from forcing online, mail-order and catalog sellers to collect such taxes, ruling that doing so would be an unreasonable burden because of the numerous taxing jurisdictions nationwide. But Congress has the power to overrule the court in the matter--and Leavitt wants Congress to do just that.

Leavitt's thinking runs counter to that of such prominent Republicans as House Majority Leader Dick Armey and Virginia Gov. James Gilmore. On Wednesday, President Bush renewed a ban on Internet taxes for another two years. But for Leavitt, the issue is about fairness and about giving states the means to support themselves.

CNET News.com spoke with Leavitt just as a group of governors and state legislators met in Salt Lake City to discuss simplifying states' sales tax systems to make it easier for e-tailers to collect tax.

Q: Why is it important for states to be able to collect taxes on e-commerce sales?
A: E-commerce is taxed now. It's just difficult to collect it. Our purpose is to create a system that treats everyone the same. No one likes taxes, but if you have to have them, it ought to start with a basis of fairness, and that would mean that everyone would be treated similarly.

The future of the republic's not at stake here, but the fairness of how we operate is certainly at stake. It is a very serious competitive disadvantage for the brick-and-mortar store, and it is unfair. Likewise, it's unfair to the taxpayers who pay their share to have a large group or a large segment of our economy excused from contributing to our schools and our roads and our law enforcement.

E-commerce sales in the third quarter comprised 0.9 percent of overall retail sales, according to the Commerce Department. That's basically the same percentage as last year. How much is e-commerce really hurting the states? Less than 1 percent of overall retail sales doesn't seem like a whole lot of money.
Three years ago, it was only 0.3 percent. It's basically gaining at very

Leavitt on the importance of taxing e-commerce sales.

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high rates of expansion. And the University of Tennessee and Forrester Research project by 2011, as much as 7 percent of all state revenue will have been eroded as a result of it. So it's a very significant matter. More importantly, it has a detrimental impact on the fairness of our marketplace. Government tax policy ought not to be the basis by which winners and losers are chosen. We ought to have a fair system.

Right now, mail-order and catalog sales comprise a whole lot bigger chunk of the marketplace than e-commerce does, and people don't pay sales taxes on those, either. Why focus so specifically on e-commerce?
This is about creating a level playing field. Yes, e-commerce is small, but there's a point in the life of every problem where you can see the problem because it's big enough, but it's still small enough that you can solve it. And that's where we are right now.

I don't think there's anybody that questions the fact that e-commerce is a relatively small percentage of total sales. I don't know anyone who doesn't believe it's going to be a rapidly expanding portion. It will be a very significant part of the way retail is conducted, and it will likely be the major retailers that have the largest success.

What is the status of the states' efforts to simplify sales taxes?
We have 20 states that are working collaboratively to develop a system that will be then offered to each of the states. The system would be very simple in that a person would buy just like they do now on the Internet and a set of rules would be established that would be embedded in the software of each of the vendors. It would be collected and then distributed to the proper state. It's a system that technology will in fact provide the solution for.

What does "sales tax simplification" mean?
First of all, it means we have to have some standard definitions, so that we are all basically dealing with the same type of good or service. Second of all, we need to create a matrix where the states can decide whether they want to tax it or not so that one state might choose to tax something and other states might not, but they at least would be defining it the same. That's really to make it feasible for Internet sellers to know--for the systems to know whether or not something should be taxed or not.

Lastly, it needs to be embedded in the systems so that it's transparent and it takes away the burden from the sellers.

Earlier this month, Congress passed the extension of the Internet tax moratorium. Some senators tried to tie the sales tax issue to the Internet tax moratorium but failed. Does that failure set back efforts to get Congress to address the issue?
Well, the states and the retail industry are going to be placing

Leavitt on the political debate about Net taxes.

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increasingly more pressure on the Congress to help us solve this. What we're really talking about is whether, in the long term, the sales tax is a viable way for states or local governments to finance themselves. If it turns out that it's not, then they've got to start looking for other alternatives.

With Congress traditionally reluctant to be accused of raising taxes, isn't it going to be just as difficult two, four or 10 years from now to convince Congress and taxpayers that you need to be able to collect taxes on e-commerce sales?
It will be impossible unless we have a system that removes the burden from the seller. And it will be impossible unless the system that's developed creates some equity. But it is possible and, in fact, likely, if both of those things are achieved.

A large percentage of people who buy over the Internet pay the sales tax. And that doesn't seem to be that troubling to them because they pay it at the store; they pay it everywhere that it's owed.

The economy is in a downturn. States have been unable to collect taxes for years on services and mail-order sales. How much of this debate is being driven by these other factors outside of e-commerce?
We started this discussion five years ago and the discussion really was driven by a question of federalism. Who ultimately will control the way expenditures are made and the way appropriations are handled? It was a very, very small piece of the retail pie then, but it's growing. I'm sure that there are states that have more intense interest in it today than they did before because they are dealing with deficits.

One of the things that caused states to be reluctant to pursue this was that they had adequate resources to cover their needs. There are very few states that have that situation now. And as a result, I suspect there is more interest.

Are you fearful that politicians who are advocating collecting taxes on e-commerce are going to pay a political price for it?
I suspect there have been very few public figures that have been more We ought not to have an economic policy that says we're going to let some businesses survive by not requiring them to pay taxes when we're going to have their direct competitor have to pay them. prominent on this issue than I have, and I have successfully been re-elected through the course of it. I think public-opinion polls definitely show that when it comes to the question of equity, people want a tax system that's fair.

It's very clear as well that those who are opponents of it have a very easy phrase: "Don't tax the Internet." Well, no one likes taxes, and no one wants to tax the Internet. And that's a misleading statement, but it's one that in the course of political debate has an attraction. There are lots of issues that are unpopular that in principle are right. My purpose is to drive the debate. I've got a clear opinion that we ought to have a system that's fair and that treats everyone the same.

And if it doesn't happen?
It may be that in the push and pull of politics, it can never happen. If it doesn't, it will ultimately have to be resolved in a different way because the revenues won't be there, and we'll have to decide whether they deal with more property tax or more income tax, neither of which are going to be happy events.

This is going to be resolved probably long after I'm finished with my public service, and it's going to benefit my public service very little because over the course of the next three to five years, this is just going to be unfolding. But this is a big-picture issue. This is about defining who controls government. If the federal government decides that they are going to take away from states the capacity to control their own tax policy, that's a big change. That's not happened before, but that's what's happening now.

Folks on the other side of the issue are saying that governors like Mike Leavitt have been screaming about this issue for years--ever since the Supreme Court prohibited states from collecting sales taxes on most mail-order sales back in 1967. They say the governors and states have been screaming that the sky is falling for years, and the sky hasn't fallen.
The future of the republic's not at stake here, but the fairness of how we operate is certainly at stake. The truth is, the last 10 years we've had very good revenues. But I think if you go back now to the states where they say they've been "awash in money," well, they're not.

I've cut taxes 32 times in the time that I've been governor. This isn't about raising taxes. This is about a tax system that's fair. What you've got is a situation here where we have a tax and it's not being collected, and it's not being collected in a non-uniform way. And we just ought to fix that, because ultimately when it grows to be big, it's going to have a lot of impact on the shape of government. It's going to have a lot of impact on who pays. And it's going to be impossible to fix because it will be too big and the impacts will be too great.

Why are states entitled to a cut of e-commerce sales, especially if I'm not making them at a local retailer that benefits from state services?
That's at the heart of this. The sales tax is on you as a consumer. When you make a purchase, you're the one being taxed, not the seller. Under the system we've been talking about, this streamlined system, the retailer would be paid to collect it and to remit it. But the tax is on you. And the benefit goes to your community.

That's the missing piece here. The sales and use tax is a tax on consumption. If you don't like that, then the legislature in California ought to change that.

But if you're going to have it, just because you bought on the Internet and

Leavitt on being a Republican who supports e-commerce taxes.

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somebody else bought at a local retail store, why should that change whether you pay that tax or not? It's not on the retailer. It's on you.

Some online retailers warn that if they have to collect taxes on e-commerce, there will be dire consequences for both themselves and for e-commerce as a whole. What do you think about that?
Someone said people like the governor have been saying the sky is falling for a long time. Well, I think that comment could be made about that argument.

The reality is we ought not to have an economic policy that says we're going to let some businesses survive by not requiring them to pay taxes when we're going to have their direct competitor have to pay them.

Ronald Reagan said that tax policy ought not to be part of choosing winners and losers. It ought to be even and fair and applied to everyone the same, and I believe that. Taxes are part of society. The tax is on the buyer, on their consumption, not on the seller. If we can't make it absolutely free of burden, or as free of burden as it is to any other retailer on the Internet seller, then we ought not to have the tax.

Does it make you uncomfortable being a Republican who is so outspoken about collecting taxes on e-commerce sales?
Well, it's a hard issue, but let me remind you that I'm not the only governor in the country that supports this. There are 44 of us out of 50. And the vast majority of them are Republican.

My tax-cutting record is intact, and I stand tall in that category. But this isn't about a new tax. It may be about people who'd like to interpret it to that purpose. It may be about people who'd like to carve out a special economic place for themselves forever by using that rhetoric. But you can't defend this on the basis of sound tax policy.

Tax policy is not the thing that people like to talk about very much, but the reality is it's not justifiable. It's just not justifiable for one bookseller to have to collect a sales tax and the other one not to. There's just no way to justify that.

Taking a step back, what should be the proper role of government taxation on the Internet and in the Internet age?
The best tax policy is the lowest rate applied to the most broadly defined base and applied to everyone equally. Taxes clearly inhibit commerce, and so the lower the rate, the less it will inhibit commerce. But if you have fewer people paying, the rate's bound to be higher.

And that's what's happening to the sales tax. We have continued to allow the base on which it's charged to erode and erode and erode, so you have fewer people paying more.

The best tax policy is more people paying less.