Utah Gov. Michael Leavitt offers a proposal to extend a three-year moratorium on Internet taxation

Utah Gov. Michael Leavitt, the National Governors Association chairman, yesterday offered a proposal to extend a three-year moratorium on Internet taxation during which time a pilot tax program involving states and Internet-based retailers would be conducted.

The proposal came just one day after Virginia Gov. James Gilmore, chairman of the National Advisory Commission on Electronic Commerce (NACEC), declared himself against taxation of the Internet in any way.

Leavitt's plan, which was endorsed by the NGA and the National Association of Counties, calls for volunteers from states and retailers to participate in a three-year pilot involving a trusted third party in the tax process. TTPs, which could include credit card companies such as Visa International and American Express Co., would calculate taxes for areas where goods ordered online were delivered, then collect the taxes and remit them to the states.

"Our current sales tax system is not adaptable to the Internet economy," Leavitt said at a Washington, D.C., press conference Tuesday. "We are not calling for any taxes on the Internet itself...but the traditional laws and rules simply don't work.... The [current] degree of complexity is unacceptable" from the more than 7,000 different jurisdictions nationwide.

Gilmore said his plan could be summarized in three words: "No Internet tax." He agreed with Leavitt that "the old rules, the old models, the old ways simply don't work anymore," but disagreed with the voluntary nature of the NGA proposal.

"I can support such a system...if we make all taxes voluntary," Gilmore said at a policy forum on Monday. "And, while we're at it, let's make income taxes voluntary and property taxes voluntary, too."

Leavitt, one of the 19 members of the NACEC, expressed doubt that the group would produce any unanimous conclusions and plans to propose a "zero-burden" plan at the December meeting in San Francisco.

"I don't expect, frankly, that the [NACEC] will provide a conclusive report," he said, adding that Gilmore's assertion that the Internet is "special" and should not be taxed at all is misguided. "This is about fair play," Leavitt said. "Ninety-nine percent of transactions are still done traditionally...it's not about free trade, but protectionism and special privileges."

Gilmore concluded his remarks by comparing the future of the Internet to the Iron Curtain. "America must not construct an Internet Curtain," he said. "We must advance democracy, freedom and capitalism online."

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