State E-Taxes Loom,
Federal IT Spending Spree Funded

States vote to simplify sales tax rules in hopes of winning court approval to tap into $45B of projected revenue losses. Meanwhile, the U.S. Senate is expected to ratify a Homeland Security bill that could shell out more than $2 billion on IT spending.

by Roy Mark of internetnews.com [November 14, 2002]

Efforts to impose an eventual Internet sales tax reached the end of the beginning phase this week when representatives from 32 states approved model legislation designed to create a system to tax Web sales.

Spearheaded by the National Governors Association (NGA), the Streamlined Sales Tax Project (SSTP) would require participating states to have only one tax rate for personal property or services effective by the end of 2005. Included in those services would be online sales.

Currently, sales and use taxes are owed on all online transactions, but states are prohibited from requiring remote sellers to collect and remit those levies. A 1992 U.S. Supreme Court decision said states can only require sellers that have a physical presence or "nexus" in the same state as the consumer to collect so-called use taxes.

The court ruled that the current patchwork of roughly 7,500 taxing jurisdictions across the country is too complex and burdensome for online retailers to charge and collect sales taxes. In order to collect the taxes, the court ruled, states would need to first simplify the existing system.

This week's vote represents the first step in that simplification. The coalition of states voted to require participating state and local governments to have only one statewide tax rate by 2006 for each type of product taxed.

"This is a 21st century system that will dramatically improve the morass that currently exists," said Utah Gov. Michael Leavitt.

The NGA launched the STTP in 2000 with the long-term goal of presenting Congress and the courts with a system that would allow the states to collect sales taxes on online sales and catalogue purchases.

Under the SSTP model legislation, states will develop uniform product codes and sourcing rules, uniform definitions of what is taxable, and simplify administrative policies. They would then provide software free of charge to retailers that would calculate, collect, and remit the taxes owed on remote sales.

If at least 10 state legislatures approve the provisions of the agreement, court and congressional approval would then have to follow. The effort, if successful, would be the first overhaul of the nation's sales tax policy in 40 years, and the first time states had acted together to significantly restructure the system.

Although the process still faces many state and federal legislative pitfalls and, if successful, is still at least two or three years away, the prize for the states is well worth the wait. A report by the University of Tennessee last year estimated that all 50 states could collectively lose more than $45 billion in Internet sales tax revenue in 2006.

The study, commissioned by the Institute for State Studies and prepared by the University of Tennessee with data collected by Forrester Research, shows the revenue impacts for states are significant. Nearly half of state revenues come from sales taxes and more than 40 percent of state spending is dedicated to education, law enforcement, and transportation projects.

According to the study, in 2001, inability to tax e-commerce likely cost state and local government revenue a loss of $13.3 billion. By 2006, the loss will more than triple to $45.2 billion; and in 2011 the loss will be $54.8 billion. The cumulative total of losses between 2001 and 2011 is $439 billion. The report also shows how much each individual state will lose from uncollected sales and use taxes.

The Internet Tax Freedom Act passed by Congress only prohibits states from taxing consumers on the use of Internet service providers. The current moratorium does not apply to sales taxes, nor to federal taxes.

Homeland security
The U.S. House of Representatives is expected to pass a new version of legislation this week that will create a cabinet-level Department of Homeland Security combining 22 federal agencies with an estimated budget of $37.4 billion, including $2.12 billion for IT.

The Senate is expected to pass the same legislation as early as Friday and send the bill to President George W. Bush, who has called the legislation "the single most important business" before the lame duck Congress.

The new department will represent the largest reorganization of the federal government since 1947 when Congress combined a number of military agencies into the Department of Defense. The major agencies giving up their independent status and joining the Department of Homeland Defense include the Secret Service, the Coast Guard, the Customs Service, the Federal Emergency Management Agency and the Immigration and Nationalization Service.

A new provision in the compromise bill includes allowing the new Secretary of Homeland Defense to designate a lead research organization to help coordinate security research across the government, the academic community and the private sector.

Another new provision, adopted from the Senate version, establishes and funds a Homeland Security Advanced Research Projects Agency, similar to DoD's DARPA, to help identify promising technologies.

The legislation also adds two new provisions that "encourage partnerships between government and the private sector to better protect civilian infrastructures such as telecommunications, transportation nodes and power grids."

In addition, it establishes procedures to encourage private industry to share infrastructure vulnerabilities with the government to help identify and correct weaknesses and calls for a so-called NET Guard, volunteer teams to help local communities respond and recover from attacks on information systems and communications networks.

The combined 2002 IT budgets for the agencies being incorporated into the new department is $1.47 billion. That number is expected to jump to $2.12 billion in 2003. Overall, the Government Electronics and Information Technology Association (GEIA) is predicting total federal IT spending will be approximately $53 billion. According to GEIA, federal IT spending will reach approximately $67 billion by 2008.

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