Changes in technology have opened up amazing new frontiers in business and commerce over the past several years. Advances in biotechnology and science are changing the course of our daily lives. But of all the developments we have seen in the past decade, none really compares with the emergence of the Internet. This new technology has fundamentally changed the way people interact with each other. E-mail and the Web are revolutionizing the way we live and work, from telecommuting to doing school research projects. People are managing their world from their computers, and online transactions have opened up new possibilities for businesses and consumers alike.

As one of the states leading this information revolution, Massachusetts has actively supported our high-tech firms over the past decade. Our world-class educational institutions have produced many of the leaders in this industry, and the Milken Institute recently named Massachusetts the state best positioned to take advantage of the New Economy.

But in doing so, we have not ignored the needs of our traditional businesses. We have made fundamental changes in our Commonwealth to strengthen business opportunities. We have cut taxes a total of 41 times over the past 10 years, including a cut in the capital gains rate and the income tax cut approved by the voters last November. In total, we have returned $4 billion per year to businesses and residents across Massachusetts. We have reformed the workers compensation system, and have instituted the innovative Economic Development Incentive Program. The EDIP allows businesses to ease their tax burden when they make investments in economically needy areas. This keeps businesses in Massachusetts, and creates jobs in the process.

While we work to improve the atmosphere for businesses of all kinds, we must also understand that industries are different. Retail stores have different needs and different competitive advantages than their online counterparts. In a retail store, we can look at products, sample them, and take possession immediately after purchase. If we order a product through the Internet, we have no way to test the item, and must wait–sometimes up to six to eight weeks‹for delivery before having the product in hand. And to have the item shipped, we usually pay 8 to 10 percent of the cost of the original product. This is more than the 5 percent sales tax on retail purchases. For all the dire predictions two years ago, our retail stores continue to thrive in the computer age, and they still offer services that no online seller can provide.

But besides these inherent differences, there is another important distinction between traditional and Internet retailers. Internet companies are still a fledgling industry. A sales tax on this fragile market would only serve to crush a promising opportunity for the future.

Even if we wanted to make this policy mistake, it would be a legal and practical impossibility. In Quill Corp. v. Heitkamp, the US Supreme Court found that states do not have the right to tax a remote seller without that seller having a substantial in-state presence. And if we tried to attempt the collection of these taxes, we would soon find it to be an impossible task. Between state, county, and municipal sales taxes, there are 7,600 separate taxing jurisdictions across the country. For a catalogue or Internet seller to collect the correct tax from each individual customer, the company or the government would need to create a bureaucracy that would make online ordering unprofitable from the paperwork alone.

To be sure, Internet stores will compete with traditional retailers to some degree, but the competition is not one-sided. Each has advantages and disadvantages. The important thing is that consumers are able to decide which option best serves their needs. Stifling the Internet market will only destroy choices for the public. It is bad policy for the shopping public, and it is bad policy for Massachusetts as a whole.

Jane Swift is governor of the Commonwealth.

Tax scheme would harm innovation economy

By Christopher R. Anderson
Fall 2001

Computer networking capabilities continue to rapidly transform how we communicate. Consumers, students, and businesses interact almost instantaneously, without regard to geography. So why would we even consider creating additional schemes to tax and collect taxes on the Internet–a process that would result in the erection of new governmental barriers to the economic-growth potential of this critical information age infrastructure?

Advocates of a unified Internet tax collection system are merely doing the bidding of pro-tax forces. Allowing other states and tax jurisdictions to tax Internet transactions would land a powerful body blow to the Massachusetts economy, which until now has outpaced the sputtering national economy.

Jon Hurst’s characterization of the Swift administration as being removed from the debate on Internet taxation could not be farther from the truth. In fact, Gov. Jane Swift, like her predecessor, former governor Paul Cellucci, has been a national leader in support of extending the moratorium on new taxes on the Internet and opposing the so-called tax simplification plan because it would be detrimental to the Massachusetts innovation economy. Swift has led a bipartisan coalition of governors from the leading high-tech states (California, New York, Virginia, and Colorado) in opposing the Internet tax expansion plan.

Keeping the economy strong for the long term is more important than shortsighted tax proposals that would be facilitated by a complex and predatory tax-collection scheme. The estimated revenue potential for Massachusetts from taxing Internet sales is about 1 percent of the Commonwealth’s $24 billion annual budget, a paltry harvest for choking off a sector of the economy that is still growing, one that could help to power the state’s economy for decades to come. Swift and her fellow high-tech state governors will have to work overtime to combat the lobbying of more than 40 governors of other states, all of whom want to tap the riches of the Massachusetts innovation economy.

The past two US presidents have understood the need to keep the Internet free from burdensome taxes. In 1997, President Bill Clinton expressed views consistent with then-Gov. Cellucci’s position. In a document outlining the federal government’s strategy to accelerate the growth of global commerce across the Internet, the Clinton administration stated that “governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures, or new taxes and tariffs on commercial activities that take place via the Internet. . . . No new taxes should be imposed on Internet commerce.” President George W. Bush has exhibited strong leadership in calling for an extension of the Internet tax moratorium. Unfortunately, most of the nation’s governors and lawmakers do not share the same courage and foresight of Gov. Swift and presidents Bush and Clinton on this crucial economic development issue.

What is conspicuously absent from Hurst’s argument is proof that the entry of “e-tailers” into commercial markets has harmed Main Street businesses. However, there is no such shortage of evidence that taxing the Internet would have a detrimental impact on the national and local economy. Cambridge-based Forrester Research has estimated that, by 2004, taxing Internet sales would add $5.6 billion in new costs to online transactions–a huge burden to an industry that is still in its infancy. In order to compete in the global economy and retain Web-based companies that are becoming more and more portable, we must keep the United States a tax-free Internet zone.

Another tactic of Internet tax proponents is to demonize high-tech companies as faceless or imply that they do not live up to a civic standard. Houston Mayor Ron Kirk’s assertion that ‘Net-based firms have less right to municipal services than brick-and-mortar establishments is not only irresponsible, but also erroneous. The Internet tax debate swirls around sales and use taxes, which here in Massachusetts do not fund local services. All high-tech companies with a presence in Massachusetts pay local property taxes–the primary funding source for local fire, police, and other services. They are also subject to other business taxes, and high-tech employees pay tens of millions in state income taxes. In fact, Mayor Kirk’s hidden agenda–as it is for most who argue for a uniform tax system–could be to set up a new Internet tax for the Houston region, one of more than 70,000 taxing jurisdictions around the country that could begin levying taxes for online sales if the moratorium is lifted.

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Logic dictates that a complex national tax system–which could create a bureaucracy that would rival the Internal Revenue Service–would require an understanding of the differing tax codes enforced by thousands of different authorities. While compliance would challenge even the large chain retailers–who already employ fleets of accountants and systems managers–it would prove impossible for smaller, neighborhood mom-and-pop employers who would be forced to hire tax specialists or make expensive hardware and software purchases just to keep up with the new requirements. While this may be good business for a cottage industry of software developers and accountants, it’s harmful to the overall economy, particularly in the Bay State.

Instead of promoting a new tax on another sector of the economy or pursuing a quixotic pilgrimage to repeal the state sales tax altogether–this is Massachusetts after all–Main Street retailers should follow the example of the big retail-chain members of the Retailers Association and adapt to modern economic realities by increasing catalogue and online sales. Instead of advocating for a system that will help other states, counties, and municipalities tax the commerce of Massachusetts businesses at unprecedented levels, traditional retailers should support policies that bolster the entire state economy, such as lowering unemployment-insurance rates and preserving the capital gains tax cut of 1994. On behalf of the approximately 200 members of the Massachusetts High Technology Council, we encourage the entire business community and the entire state delegation in Washington to follow the lead of Gov. Swift and oppose new Internet taxes and new tax-collection schemes that will hinder the growth potential of Massachusetts’s increasingly diverse technology economy.

Christopher R. Anderson is president of the Massachusetts High Technology Council.