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Sales Tax on E-Commerce

Young woman making a purchase electronic

The newspapers I delivered as a boy in the 1960s were sectioned into news, comics, sports, and the classified advertising pages. Classified ads seemed to fuel the inner scavenger in my dad, who looked through them religiously just to see what people were selling. 

At the dawning of the internet in the early 1990s, an online auction site called eBay emerged—a virtual marketplace accessed by computer. Initially, people saw it as an electronic version of the classifieds, with the added excitement of a live auction. It soon became clear, though, that eBay was not just a marketplace for repurposed artifacts; it was a new sales channel for, well, just about everything. Perhaps it was my father’s genetic influence, but I found it fascinating. 

Even though I had a day job as governor, I suggested to my two oldest sons, then ages thirteen and fifteen, that we create a small online business, buying products in bulk and selling individual items to consumers. An opportunity to teach them entrepreneurship, I reasoned. 

Our first product was a small handheld Olympus digital recorder. We bought fifty of them for about fifteen dollars each. Within a week we had sold them for between twenty and thirty dollars. The boys shipped the merchandise to successful bidders in many different states. Elated by our early success, we ordered fifty more Olympus recorders. 

That second order did not fare as well, but provided three lessons—one for the boys, and two for me. The lesson for my teenagers was about supply and demand. If Olympus floods the market with small digital recorders and a lot of people are competing to sell them at the same time, the price that consumers are willing to pay goes down—way down. Exactly what happened to us. 

The next two lessons for me were different. First, when things go south on a project like this, teenage boys lose interest quickly. Those digital recorders kicked around our house for a long time. But it was the second lesson that became more important to me: Nobody collected sales tax on internet purchases, and internet sellers loved the price advantage that gave them. 

Being governor made me hypersensitive about whether our little venture comported with the law. “Governor Skating Around Sales Tax Collection” would not be a helpful headline. So, I asked one of Utah’s state tax commissioners, Roger Tew, about the collection of sales taxes on internet commerce. 

Candidly, I had not thought much about the arcane subject of how sales tax gets collected and had given zero thought to the vast complexities of an internet seller collecting and remitting sales tax to the proper state. Roger Tew’s response began to illuminate a Pandora’s Box of public policy issues related to e-commerce. 

From Personal to Policy 

My conversations with Roger Tew set off a wild ride of political and policy struggles between 1997 and 2003, related to the advent of e-commerce. There were ugly fights requiring that my colleagues and I stand in the way of a powerful group of technology companies and political leaders—primarily those in my own political party. 

Throughout the late 1990s, an explosion of internet businesses had begun to emerge. Silicon Valley venture capitalists were funding just about anybody with a web-based idea and a business plan. It was the new frontier. 

I was working to position Utah in a way to exploit these new technologies in our state. It was my aspiration that Utah would begin to deliver services online and capture the new jobs this movement was spurring. I was well into the process of building Western Governors University (WGU), which was itself an internet business. Clearly, I was one of those who saw the vision of e-commerce and was committed to do everything necessary to ensure it moved forward. However, I saw that one potential barrier to e-commerce was access to the internet. Access to internet service was a major challenge in fulfilling the potential of the internet. At that point in time, most internet connections were achieved using a phone modem connection. It was slow and uncertain. But faster and better technology was within our sightline as the tech boom ignited. The tougher dilemma was how the explosion in e-commerce impacted sales taxes. 

Sales Tax on E-Commerce Dilemma 

Sales tax is one of the three primary sources of income for states—the other two being property tax and state income tax—and most municipalities depend on it to finance the services they provide. It was during the Great Depression that sales taxes first came into being, and by 1947 they had become the single largest source of income for states and local governments.(1)

Sales tax laws are typically defined by state legislatures. These laws often allow local communities some flexibility to raise or lower the rates and to decide what goods are exempt from taxation. Sales taxes are then collected by the states and distributed back to the cities or other jurisdictions based on a formula devised by the legislature. It generally involves a split between the local government jurisdiction where it was collected and the state itself. 

Another important nuance in sales tax policy is that the actual name is sales and use tax. The use part is important because the duty to pay the tax actually belongs to a consumer. However, state legislatures also make it the merchant’s duty to collect the tax at the time the transaction occurs. Point-of-sale tax collection on every retail purchase is how the system works. 

Catalog sales had always been a fly in the ointment of sales tax collection. In the 1950s and 1960s, a Sears catalog could be found in most homes. If a person in my hometown of Cedar City bought a refrigerator from Sears through the catalog, they would send their check to Chicago, Illinois. However, the refrigerator might come from a warehouse in California. This presented several issues: Did the sale take place in Utah, Illinois, or California? Who was responsible to collect the money? Since the buyer lived in Utah, could the state of Utah compel a company in California or Illinois to collect and remit the sales tax? 

This dilemma was irritating but tolerable. Catalog sales were a very small percentage of the total, and states just accepted the revenue leakage but assumed it worked out in the wash. 

In 1992, however, the United States Supreme Court shook up the status quo with a ruling in the Quill Corp vs. North Dakota case. The court declared states could impose a duty to collect taxes on businesses outside their geographic boundaries—if the business had nexus in their state.(2) 

Three years later, in 1995, two businesses were formed that would soon turbocharge e-commerce and dramatically change the consumer market: Amazon and eBay. At the time, Amazon was just a small, online book seller and eBay was strictly an auction site. I got to know their respective CEOs, Jeff Bezos and Meg Whitman, by attending Allen & Company’s conference in Sun Valley, Idaho; each had presented at the conference as one of four small, interesting companies the organizers invited. 

“At some point this transition could highly affect the retail industry.”

Amazon was based in Washington state. Under Washington’s state laws, Amazon would be required to collect sales taxes on books sold to Washington residents. But if Amazon had no facilities in Utah and a Utah citizen bought a book from them online, there was no obligation for Amazon to collect the tax. 

Technically, the Utah citizen was supposed to pay the tax as part of their income tax filing, but it was rarely enforced—and difficult for a citizen to keep track of in the first place. This gave Amazon a clear price advantage over places like the Sam Weller Book Store on Main Street in Salt Lake City.(3) The same book sold at both stores could consistently be sold 7.5 percent cheaper on Amazon. 

And that is where the problem—the sales tax dilemma for states—became abundantly clear to me. The lack of sales tax on e-commerce transactions would significantly affect retail stores, as people looking for a bargain would more likely shop online if they could get a cheaper price. Then, because sales tax is a significant source of state and local revenue, less sales tax coming in means less money for state and local governments to function. These problems needed to be addressed. 

A Public Policy Controversy 

At a meeting of the National Governors Association’s executive committee in December 1996, I raised my concerns about the taxation of e-commerce, expressing growing worry for the future of the sales tax. Using my personal experience, I painted a picture for the governors on the committee. E-commerce was going to become a major factor in commerce, I predicted. At that point in time, the combination of catalog and internet sales were less than one percent of total retail, which was manageable. But what would happen when it was ten percent, twenty percent, or forty percent of the retail economy? 

I recounted to the other governors what I had learned from Roger Tew about the complexities of the current system, and how unequipped the states were to deal with the widespread collection and distribution of e-commerce sales. I pointed out the significance of the Quill Corp vs. North Dakota decision, noting that while it was focused on catalog sales, the issue would increase at an exponential rate because e-commerce was about to explode the problem. Unless the states reinvented the sales tax collection system, the current collection requirement would be a burden to interstate commerce, and within a couple of decades sales tax would no longer be a sustainable state funding source. The impact on our local economies would be staggering. 

“At some point this transition could highly affect the retail industry,” I said. “If the states fail to fix this problem, the unlevel playing field between remote sales and retail sales would create worker displacement.” Economies change, and at times workers are displaced in a market-based economy. However, those shifts should occur naturally, not because the government treated one distribution channel better than another.

I thought that failure by the states to streamline sales taxes and to find an efficient means of operating in an e-commerce world could also turn out to be a catastrophic blow to federalism. If states and local governments saw dramatic erosion of sales tax, they would become more dependent on Washington, D.C., for funding, and the power would shift further from the people. 

I suspect my colleagues may have thought I was a bit extreme in my predictions, but they understood the core issue. It was clear from the discussion that the National Governors Association (NGA) staff had been thinking about the sales and use tax issue too. Afterward, they thanked me for giving the issue energy in the meeting. 

The executive committee agreed that NGA needed to make this a priority and chose someone to lead the task. As in most situations, the person raising the concern ends up with the job. I agreed to become the lead governor on NGA’s efforts related to sales tax. 

Months after I raised the matter to the NGA executive committee, Republican Congressman Chris Cox of California and Senator Ron Wyden, a Democrat from Oregon, had a different concern about the internet and taxes. They were concerned that states and local communities would begin to place taxes on internet access in the same way telephones or highway access is taxed at the state level. They argued that taxing internet access would inhibit the capacity to scale quickly. Cox and Wyden each filed bills in their respective congressional chambers called the Internet Tax Freedom Act (ITFA). Their aligned aim was placing a permanent moratorium on any taxation that could slow the growth of the internet. 

The Internet Tax Freedom Act didn’t just prohibit the federal government from adding taxes to internet bills, it also blocked state and local governments from doing so. Congressional supporters believed it appropriate for the federal government to prohibit this because the internet is a form of interstate commerce, yet in the U.S. Constitution, the regulation of interstate commerce is a specific responsibility delegated by the states to the federal government. 

History repeats itself, and technology is no different. In my lifetime, I have witnessed similar transformational processes. While telephone services were available for decades, it was in the 1950s and 1960s that access became ubiquitous. I witnessed television go from a novelty to redefining American culture during the same period. In each case, building and scaling the infrastructure to ensure access was expensive. Typically, the cost of developing the facilities was financed, at least in part, through taxes or publicly regulated private investment. I could see internet access following a similar path, and felt that soon, access to the internet would not be a problem. 

My work on federalism had also made me sensitive to any hint that Congress would limit capacity of the states to operate. Even though I did not like the fact that Congress would be imposing a moratorium on state tax ability, I understood their argument. 

If the Internet Tax Freedom Act had simply been about taxing internet access, I would likely have paid less attention to the issue. However, the ITFA also created a permanent moratorium on states imposing a duty on internet sellers to collect sales tax. This represented not only a very serious problem for states but also a major problem for traditional brick-and-mortar retailers who were sitting ducks, totally unprepared for the competition about to hit them. While I did not feel that the government had any obligation to protect traditional retailers from their new competitors, I did believe government needed to insist the system was fair. Giving one sales channel (internet sales) an advantage not available to another (brick-and-mortar retail) seemed totally unfair. 

The Political and Economic Environment 

In 1996, a phenomenon referenced as the dot-com era was unfolding. CEOs of companies like Amazon, America Online, Microsoft, and Google had become celebrities.(4) Billions of dollars were being poured into internet businesses by venture capitalists and legacy businesses. Those driving the movement of capital constituted a generation of rich, smart, and bold young entrepreneurs. Every politician wanted to be their friends. 

Two years prior, Newt Gingrich and a firebrand group of conservative leaders had won control of the House of Representatives in 1994, putting Republicans in charge for the first time in forty years. They set forth on an aggressive agenda of political change and transformation at the same time the technology revolution began transforming commerce and ushering in the information age. 

Though the tech community had all the ingredients to be a powerful political influence, up to that point they had not often exercised it. Both parties were tripping over each other to become close to them. In many ways the internet tax issue was a perfect opportunity for the technology community to catalyze their influence, and the Republicans were ready to help. The idea of prohibiting taxes on the internet was also a perfect glue to bind Republicans and the technology world. To his credit, Grover Norquist recognized the opportunity and stepped forward to seize it. 

Grover Norquist ran an organization called Americans for Tax Reform (ATR). A Harvard Business School graduate, Grover had become a major force in Republican politics. Both he and his organization had a bigger-than-life presence in D.C. by branding themselves as anti-tax crusaders, insisting that every Republican candidate sign an anti-tax pledge or face their wrath. By signing the ATR tax pledge, candidates or office holders committed they would not support the raising of any tax. If they violated the pledge the organization would publicly attack them. 

These internet tax issues were right down Grover Norquist’s alley. Not only was it consistent with his advocacy theme, but it also provided him with alignment and access to the captains of the technology community. 

Grover and ATR had deep relationships within the Republican leadership of Congress, and later the Bush Administration. He was regularly invited to their strategy sessions and party meetings. This was because the Republican leadership of Congress, particularly in the House of Representatives, had several leaders who were like-minded. 

Every Wednesday, Grover hosted a lunch at his office where the leaders of conservative think tanks, lobbying organizations, and key congressional staff met to discuss their points of view and to form alliances. I had been a guest at the luncheon while I was chair of the Republican Governors Association. 

The Democrats, not wanting to be left out, also saw the opportunity with the technology world. The most likely Democrat nominee for president in 2000 was Vice President Al Gore. Gore, of course, was no friend of Grover Norquist or congressional conservative Republicans, but he saw himself as the rightful holder of strong ties to Silicon Valley and the internet and wanted to side with the tech community also. 

The political establishment was ready to help the technology community achieve its policy goals. It was a formidable coalition. 

Governors like me were also scrambling to ensure our states were not left out of the movement toward a technology-driven economy. However, we had a different worry. Would this alignment of technology money and political ambition consort to erode the economic and constitutional role of state and local governments by innocuously passing a temporary moratorium on sales taxes? 

I have often observed that there is a time in the life of every problem when it is big enough to see but still small enough to solve. This problem of internet sales tax was just barely large enough to see, and it had to be dealt with early or it would become far too large to solve. The states had to weigh in. In fact, given the fawning relationship between tech and national government politicians at that moment in time, the only political force that could stand in the way of a permanent moratorium on the collection of sales taxes on e-commerce sales was the governors and states. 

Although some traditional retailers had begun to wake up to their awful situation, it had not yet become a universal priority. Those who recognized the situation began to offer some help, but they lacked the political heft required. Truly, the governors had to step up on this one, and for better or worse, I was the leader of the resistance. 

Why me? Timing was a factor. I had positioned myself to serve as National Governors Association chair. I had worked with the governors from every state and in both parties. Federalism had been an overarching theme of my work, connecting the Conference of the States, welfare reform, Medicaid work, and many other things. I had used my active role in regional and national state organizations such as the Western Governors’ Association, National Governors Association, Republican Governors Association, and the Council of State Governments as platforms. The result: I knew the governors—all of them—personally. I knew the state legislative leaders and they knew me. These relationships were vital to my ability to rally the governors and states around an issue that on the surface seemed arcane and non-consequential. 

The fact that I did not have ambitions to run for president in 2000 probably helped. This was not a populist issue and had a political downside. I also played an under-the-radar role. There were quite a few governors with much higher national profiles than me, and there were few who had closer or better working relationships with individual governors. 

Opening Two Battle Fronts 

I could see the job of streamlining the sales tax system would require two very different but aligned game plans. The most challenging requirement was overcoming the mind-boggling complexity of trying to standardize an approach among states who loved controlling their own systems. This was going to take time. 

The most pressing immediate requirement was short-term. We needed to prevent the proponents of the Internet Tax Freedom Act from enacting a permanent moratorium on collecting sales taxes on transactions occurring over the internet. Even though sales taxes were not being collected on most e-commerce transactions at that point, simply not collecting taxes that were owed was better than passing a law preventing their collection. Why? Because once a moratorium was in place, allowing it to expire would be portrayed politically as a tax increase. Eventually, sales tax collection would become unviable and would be replaced by a less equitable tax. 

The promoters of the Internet Tax Freedom Act have always said their goal was to prevent taxation of access charges. I believe this claim was a diversion. Their primary objective initially was gaining a permanent sales tax moratorium. The tech industry and its supporters knew what they were doing. This was an effort to give one distribution channel a clear economic advantage over another. 

The executive committee of NGA had expressed verbal support to pursue the issue, but there were many more governors who needed to be energized. The National Governors Association is a bipartisan organization, and as such it has a very deliberate policy process. Without a formal policy statement, it is not possible for someone to speak on behalf of the nation’s governors. Once united on a policy, however, NGA can have a profoundly important impact. Consequently, I knew my first steps needed to be getting a policy statement through the NGA. 

Prior to the winter midyear conference in Washington, D.C., I worked with the staff of NGA to compose a resolution supporting a working group among various state organizations and private business representatives to begin developing approaches to the issues e-commerce raised. The group was organized under the name National Tax Association. In addition to the NGA, the working group included the National Conference of State Legislatures, the National League of Cities, National Association of Counties, and the U.S. Conference of Mayors. Several large retailers also joined in. I was appointed to represent NGA within the group. Truthfully, I think the National Tax Association effort accomplished very little except to help engage with some private-sector allies from the retail sector. It also served as a starting place with various state and local organizations who were alerted to the seriousness of the problem through the process. 

At the 1997 NGA summer meeting, I raised the issue at our governors-only session. Then in October, NGA issued a policy paper. The paper laid out state concerns, making arguments that foreshadowed the more formal positions the states would take in the future. The paper bluntly said that there was no evidence that states were targeting the internet for taxation, only that the states’ concern was that ITFA would erode state tax collections, which preempted state authority. The paper pointed out that the legislation created an unlevel playing field among retail distribution channels. It became the basis of an interim policy statement adopted by the NGA executive committee—a statement that would require ratification at the next general meeting of all the governors in February 1998.(5)

Armed with the NGA position paper, I began meeting with various members of Congress to gauge their receptivity to our concerns. It was especially important that I meet with Representative Cox and Senator Wyden. It was clear they both supported the sales tax being part of the moratorium, but I did not sense them to be intractable. Likewise, it was clear governors and other state officials’ collective opposition had their attention. 

As the ITFA began to gain traction in Congress, the governors and other state organizations became more animated in opposition. Approaching the 1998 winter NGA meeting, I knew it was vital that the executive committee’s action have an affirming vote from all the governors. We needed to make a strong statement, so I began preparing. 

Persuading a Supermajority, Boosting Votes 

The NGA winter meeting is routinely held in late January or early February in Washington, D.C., at the JW Marriott Hotel. My practice was to fly to D.C. on a Friday evening to attend meetings of the Republican governors. Then the NGA meetings would begin Sunday morning with an opening news conference. Committees of NGA would meet in the afternoon. Sunday night was reserved for a state dinner at the White House attended by all the governors and spouses. 

On Monday, the meetings were dominated by speakers on whatever topic the chair had framed. Often the president would speak, or the governors would go to the White House for meetings with the administration. Monday was also the time set aside for a governors-only, closed-door session for two hours. This was where the things often got real, and disagreements were often made manifest. At the time, the NGA chair was George Voinovich, the Republican governor of Ohio, and vice chair was Tom Carper, Democrat governor of Delaware. Both sat at the head of the square along with NGA staff. 

The need to affirm the executive committee interim report was on the agenda. Voinovich called on me to highlight the issue and to discuss the need for a policy action the next day. I quickly reviewed the problem and how it affected every state—using the NGA policy paper as my guide. 

I had raised the issue of sales tax generically months earlier at the summer meeting, but the Internet Tax Freedom Act had not yet been filed. Now that it had, this was the first time the governors had been together to talk about the specific threat it represented. The discussion produced a very clear indication that while most of the governors were supportive, many of them had not thought deeply about the subject. More importantly, I found that there were a handful of governors who were prepared to be active antagonists on the matter. 

The small group of unsupportive governors had clearly been cultivated by the technology/anti-tax coalition and were not quite aware of my leadership and the threat the collective governors were to their efforts. This was made evident by both the nature of the arguments and the states they governed. The three primary opponents that day were Pete Wilson of California, Paul Cellucci of Massachusetts, and Jim Gilmore, the newly elected governor of Virginia. This was not an ideologically driven connection. What all three governors had in common was their states’ statuses as burgeoning tech and internet business hubs. California was home to Silicon Valley; Boston, Massachusetts, was aggressively courting internet businesses; and Virginia was home to America Online, one of the first major internet successes. The three were spirited in their objections during the governors-only meeting. 

“There should be no special breaks for the internet, but we can’t allow unfair taxation to weigh it down and stunt the development of the most promising new economic opportunity in decades.”

That Tuesday, the policy meeting was held where formal positions were voted up or down. Given the momentum that was developing in Congress for the Internet Tax Freedom Act, getting an affirmative vote was critical to my ability to form a serious obstacle to the bill’s passage. The robustness of the opposition’s reaction in the governors-only meeting and the still unformed thoughts of many governors had created some doubt in my mind that I could get the supermajority vote required for an NGA policy. I spent the next twenty-four hours working to shore up my support. 

I had prepared a more detailed presentation than the one I made at the governors-only session. I carefully articulated multiple reasons why states should see the Internet Tax Freedom Act as hostile to states and local governments in the near term and long-term. I dealt with the economics, the constitutional issues, and the political implications of the push and pull of state and federal relationships. I pounded the unfairness of this to retailers and small, main-street businesses. At the conclusion, I felt like I had acquitted myself and the issue well. Although the opposing governors also made their views known, I got the supermajority vote I needed. Shortly after the vote was taken, an event occurred that taught me a valuable lesson and foreshadowed the nature of the politics that was likely to play out over the next four years. 

Seating at NGA plenary sessions was for the most part, random. As it turned out, I ended up sitting next to Pete Wilson, the California governor. Pete was finishing his second term as governor. Prior to that he was a U.S. senator, and in 1998, Wilson was widely considered to be a leading candidate for the Republican nomination for president. He had, as I indicated earlier, spoken against my position on the ITFA. Pete, like all the California governors I interacted with, seemed to see themselves as well above most of what happened at NGA. So, he held himself a bit aloof, and I suppose that is understandable. He was seventeen years my senior, had lots more public experience, and represented a state with ten times the population of Utah. 

When I finished my remarks, he complimented me. He then said, “Would you mind if I borrow your notes?” while reaching in front of me to pick them up. 

His request surprised me, and I may even have felt a little flattered that this big-time guy thought my remarks were thoughtful and wanted to read them. So, I did not object to his reach. 

Wilson looked at them for about five seconds, and then stood up, walking out of the room carrying my notes with him. He returned a short time later, returning my typed talking points with handwritten notes back in front of me—saying nothing. 

I remember thinking to myself, “What was that all about?” Later in the day, I found out. 

The passage of an NGA resolution opposing the Internet Tax Freedom Act was pretty big news—at least in the realm of those who cared about the issue. As the lead governor, I wanted to use it to put the sponsors of the bill on notice. So, I had arranged to see Chris Cox, the chief sponsor of ITFA in the House of Representatives. 

When I arrived to see Congressman Cox, it became evident that Pete Wilson had photocopied my notes and sent them to Cox in advance of our meeting. Pete Wilson’s action in taking my notes that way was neither dishonest nor consequential in the outcome of things, but it was audacious on two counts. First, that he would take my notes under implied pretense. Second, that I would just naïvely let him take them. I left the Cox meeting understanding better that I had been naïve and that my opponents on this issue were going to play hardball. 

The NGA action did put Congressman Cox and Senator Wyden on notice that NGA’s formal policy position to oppose them meant bipartisan state government opposition. They also knew local governments would not be far behind. Once governors started contacting their senators and congressional delegations it would begin to generate a new level of resistance. During my next meetings both Cox and Wyden signaled they might be willing to amend their bill to appease the governors. 

President Clinton at Odds 

On February 26, 1998, only days after the NGA adopted its position of opposition to ITFA, President Clinton announced his support of the bill. “There should be no special breaks for the internet, but we can’t allow unfair taxation to weigh it down and stunt the development of the most promising new economic opportunity in decades,” Clinton told a group of technology leaders. 

“This explosion of real commerce has the potential to increase our prosperity, to create more jobs, to improve the lives of our people and to reach into areas that have not yet felt prosperity,” Clinton added. Thankfully, Clinton at least expressed the concerns of state and local governments. “But it raises new and serious issues as well. How can we further its growth and foster its magnificent freedom without allowing it to be used as a tax haven that drains funds our states and cities need to educate our children, and make our streets safe?” 

CNN, in reporting the president’s statement, noted, “Clinton’s support of the Internet Tax Freedom Act currently before Congress puts him at odds with the nation’s governors, who want to establish a single sales tax rate for online shopping.” The single rate proposal was an idea we floated out of the short-lived National Tax Association discussion. 

As disappointed as I was that Bill Clinton, a former governor, would not support something so vital to states, I was not surprised. However, in his statement, Clinton opened a potential pathway to defer the sales tax issue. As CNN further reported, “To mollify the governors, Clinton called for a bipartisan commission of elected officials, business leaders, consumers and representatives of the Treasury Department to study the issue of taxing the internet. The president said the moratorium would give this group ‘time to work through what is a very, very complex issue.’”(6)

In March, about a month after the winter meeting, I returned to Washington and had a meeting with Cox. My purpose was to see if President Clinton’s suggestion of a study commission, combined with Cox’s earlier signal, could produce progress. The visit produced what felt like a breakthrough. Cox and Wyden agreed to take existing sales taxes out of the moratorium and to shorten it to three years. During those three years, the advisory commission suggested by President Clinton would work to find a solution. 

On March 19, 1998, CNN reported: “A key legislator behind the proposed Internet Tax Freedom Act said Thursday that a compromise agreement with state and local officials has been reached to keep internet commerce tax free for the next three years. The agreement, worked out between Rep. Chris Cox (R-Calif.) and Utah Governor Michael Leavitt (R), calls for a three-year moratorium on new internet sales taxes. States and local governments, however, will be allowed to keep any taxes already imposed on on-line services. The agreement also calls for the formation of a congressional commission to find ways to tax the Internet.”(7)

Gaining Traction with Governors 

In July 1998, the annual meeting of the NGA was held in St. Louis, Missouri. Governor Tom Carper of Delaware became chair, and I was elected vice chair. At the executive committee meeting prior to the conference, I reported on the status of the e-commerce issue, offering the view that the agreement we made with Congressman Cox and Senator Wyden was a positive step. However, removing the moratorium on sales tax on e-commerce from the IFTA and forming a commission to study the problem were not final. We still needed to pursue three objectives. 

Our first objective was ensuring the legislative product passed by Congress was acceptable to states and consistent with my agreement with Cox. Passage of the bill was still months away, and both the House and Senate would want their scent on the bill. The trade-off with Cox was helpful to members of the E-Fairness Coalition because it got our biggest issue off the table for at least three years. 

It was important that we were not naïve about the advisory commission being proposed in the bill. We had no friends writing the rules for selecting or conducting its business. The new draft of the legislation provided seats on the commission for several executive branch officials. It was still undetermined who would make the appointments, and the e-commerce coalition of anti-tax organizations and tech companies was operating closely with federal officials in both the executive and legislative branch. It seemed evident we were likely to see appointments stacking the commission with loyalists to ensure a lopsided report that would give Congress a green light to expand the moratorium in a future Congress. 

A longer-term but still vital objective was determining genuine progress was being made on streamlining the sales tax process. If we could not demonstrate progress and make a convincing case that it could be done, we would lose the opportunity. The courts in Quill had made that clear. I reported on efforts I had made to bring other state and local government organizations into our coalition. 

Finally, we needed to continue to raise the profile of the issue. We had to have allies in Congress, private industry, and the media. 

During the governors-only session, and between plenary sessions of NGA, I addressed all the governors about the situation. With the handful of governors who were part of the e-commerce coalition, it was awkward. So, I focused on the need to fix the system. I framed the discussion by saying the issue we were confronting was not just how e-commerce would be treated. The real issue was whether the sales tax would be viable in the twenty-first century. I pointed out the serious flaws in the current system and pounded home the possibility that unless states found ways to fix the system, Congress would take steps to federalize the process—making this one of the most serious federalism issues of our time. 

At the conclusion of the discussion, I proposed that the states begin an active dialogue among our tax people. I asked if there were governors who would be interested in having their sales tax managers attend; thirty states identified themselves. After the NGA meeting, a September date was set. The issue was beginning to gain traction among the governors. 

Team Sales Tax 

I developed a small tax team from people in Utah whose knowledge I respected and trusted. To a large degree it had been conversations with them that helped me understand the long-term consequences of this issue. 

After the summer 1998 NGA meeting, the Utah team I had assembled to support my efforts on this had a meeting. I asked Roger Tew, Val Oveson, and Bruce Johnson, who were members of the Utah State Tax Commission, as well as a BYU professor named Gary Cornia. Of course, Rich McKeown, who would later become my chief of staff, was chair of the Utah Tax Commission. I asked Rich to lead the team as quarterback. I also asked Joanne Neumann, who headed the D.C. office, and governor’s legal counsel Gary Doxey to be part of the effort. During that meeting we laid out a plan to work on all three of the key objectives I presented at the NGA Executive Committee. 

On the first objective, getting the states working on a fix of the current system, we decided to engage immediately with the Multistate Tax Commission and the Federation of Tax Administrators. If sales tax were to be streamlined, these two organizations and their leaders would have to do it. There was no other way. 

The Multistate Tax Commission is a group of the current tax regulators from each of the states. At the time it was run by Executive Director Dan Bucks. The Federation of Tax Administrators (FTA) was a similar organization. FTA’s executive director was Harley Duncan. Both were intensely focused on the sales tax issues. 

Val Oveson, who was a former lieutenant governor of Utah and was serving on the Utah State Tax Commission, was chair of the Multistate Tax Commission. He immediately arranged for me to attend their August meeting at Dana Point, California. The audience that day in Dana Point consisted of tax and revenue leaders from nearly every state and constituted much of the nation’s brain trust on sales tax collection. 

My speech to the Multistate Tax Commission was essentially a call to action. I made the case that dramatic simplification had to occur, and that could only happen if the states worked together collaboratively to think of sales tax in a different way. I also told the audience that without dramatic simplification and streamlining, neither the courts nor Congress would be persuaded to allow states to impose a collection duty on e-commerce vendors. We had to demonstrate this could be done. At the conclusion of their meeting, the group issued a proclamation committing themselves to propose a system that streamlined the collection of e-commerce.(8)

The tax professionals in each of the states were competent, ideologically aligned people who wanted to fix the system, but they were not mighty in number or influence. However, these were the people who could figure out how to make sales tax work in the twenty-first century. Their work would be vital in getting the policy right and the systems functional.

Dan Bucks and Harley Duncan were both extraordinary people. They were well known and respected throughout state and local government circles and seen as authoritative and smart by media sources. Dan and Harley also knew the technical aspects of tax law and collection better than anyone in the country. They were committed to lead the project technically. In fact, over the next five years and beyond, these two men, their organizations, and my tax team launched the Streamlined Sales Tax Project, which became the point of the spear in reshaping sales tax to accommodate e-commerce in the United States. 

“Leavitt is a courageous politician by taking on the internet sales taxation issue.”

Once I felt confident that Dan Bucks, Harley Duncan, and my tax team were on their way to forming a process to harmonize and streamline sales tax systems, I focused my efforts on the areas I could most influence—the process of defining the issue politically, legislatively, and publicly. I viewed my job as preventing anything from happening legislatively that would permanently damage the capacity of states and local governments to collect sales taxes on e-commerce. In essence, I was buying time for the Streamlined Sales Tax Project to do the complicated work of fixing the system. 

Competing Messages 

By the fall of 1998, the E-Commerce Coalition had begun to formalize. Grover Norquist was working closely with his tech industry and congressional allies to bolster and strengthen the coalition. They had done a smart thing when they peeled off the four governors, Wilson of California, Owens of Colorado, Cellucci of Massachusetts, and Gilmore of Virginia, to help dilute the effect of NGA and the governors. 

Pete Wilson was preparing to run for president of the United States and would leave office as governor in 1999. Paul Cellucci, though Republican, was not that deeply engaged in the issue. He mostly saw it as a means of branding his state, Massachusetts, as pro-technology. This left Jim Gilmore, who was perhaps the perfect choice to become the face man for the E-Commerce Coalition. Gilmore had the perfect profile as an anti-tax conservative. He had been attorney general of Virginia before he ran for governor as an anti-tax candidate and was governor of the state where America Online was headquartered. 

The sales tax issue on e-commerce was a natural issue for Jim Gilmore to seek. He was elected governor by making his campaign a crusade to eliminate the state’s hated tax on automobile ownership. It was a clear and simple message: “Get rid of the car tax.” The truth is, the car tax was bad policy because it singled out taxation on one item of personal property. Likewise, using the unpopularity of the tax was also an effective campaign technique; it got Gilmore elected and made him a bit of a darling to anti-tax conservatives. 

In his first year as governor, Gilmore was successful in getting his legislature to adopt a plan to phase out the car tax, replacing the local government revenue it generated with other state taxes. As time went on, that plan could not be implemented, and it turned into a tax shift. At the time, however, the debate over sales taxes on e-commerce was materializing; Gilmore was coming off a legislative victory in his state that had made him a national figure; and he was still full of confidence his plan would be implemented. 

Aside from the political incentives to take on the issue, there was another valuable reward for Governor Gilmore to take on leadership of the sales tax issue. Over the next three years, Gilmore became a rather constant nemesis on the sales tax issue. We debated the issue dozens of times in influential forums across the country. He became the poster boy for the e-commerce cause, and I for e-fairness. From a policy standpoint, I was right. From a political perspective, I had a loser of a hand, really. 

During the second or third year of this controversy I was in San Jose, California, attending an event where President Bill Clinton was speaking. Sometime earlier, Clinton had told me he knew the impact not collecting sales tax would have on state and local governments, but even though I had tried many times to get the president and his administration to lean in on the issue, they would not. The administration at the time was also actively courting this new industry and he did not want to be sideways with them. 

Clinton, standing at the podium, noticed me in the crowd and acknowledged my presence. He said something to the effect that I was willing to take on hard issues. Then with a smile he continued, saying, “It is an important issue, and we have got to find a solution. But, it’s a stone-cold loser of a political issue.” 

This statement was true. Even my opponents were baffled by the dogged way I fought this issue. Grover Norquist was interviewed by a journalist from The Industry Standard, a tech industry publication, and said this: “He’s taken several stabs at playing on the national stage, and this was supposed to be his national coming out. But why in the world he thinks allowing states to interfere with interstate commerce will make him popular in the Republican Party is beyond me.”(9) Truthfully, it is a logical question as to why I became so involved in this issue, because like Gilmore’s state of Virginia, my state of Utah aspired to attract e-commerce businesses. So, why did I see this as an important issue? 

Why This Issue 

Grover Norquist’s comment about my involvement was interesting for a couple of reasons. His characterization that this was a “national coming out” was simply wrong. It just happened; I was not thinking in political terms. 

So, too, was Norquist’s quote interesting due to the way he cast the issue: “interfering with interstate commerce.” Clearly, they wanted to define the tech industries desiring a market advantage as interference with interstate commerce. Interference with interstate commerce involves deliberate moves to prohibit or obstruct trade among states. While clearly e-commerce is often commerce taking place across state lines, the existence of a sales tax on a state resident is not interference, and collecting it is a basic function of government, even though at that time states lacked a rational system to do so. It was something to be fixed, not an excuse to eliminate an important part of the national taxation system. 

Also, the basic lack of fairness was simply offensive to me. I felt the “no sales tax on e-commerce” effort was simply bad policy. It was an effort being driven by a self-interested industry coalition with a lot of money and influence that was trying to carve out a special and permanent market advantage for itself. It was disingenuous and totally unfair to businesses who just happened to sell their products from retail stores. In time, the market sorts out this kind of competition. It should not be decided by one segment using government influence to defeat the other. 

I also felt it was an egregious violation of federalism that would ultimately result in the creation of a national sales tax. Sales across the internet were destined to grow. We needed to create a new system that would allow this new marketplace to collect sales tax on behalf of states without undue burdens. If we did not, it was only a matter of time before Congress began to collect the money. Their approach would be to keep part of it, then attach strings of control on the monies they collected. It was clear to me that e-commerce would become a massive share of the market, and that unless we completely redesigned the sales tax system it would fail us. State and local governments would lose dramatic amounts of tax revenue. Local and state governments would have to raise other taxes. Overall competitiveness of the country would be diminished. 

I believe in limited government. However, government as a necessity for an orderly and safe society. Taxes are a requirement for government to work. The burden of taxes should be apportioned in a fair and equitable way. 

Both Sides Refine Messages 

To succeed, political campaigns and political movements must boil the essence of their arguments into concise, understandable messages that speak to the values, interests, and ideology of various groups and constituencies. By the early summer of 1998, both sides of the sales tax on e-commerce debate had begun to frame their messages. 

Congressman Cox and Senator Wyden, in promoting their effort to permanently prohibit taxation of internet access (the twenty-dollars-per-month charge for service) had adopted the phrase, “Don’t tax the Internet.” It was powerfully simple, and it conveyed in understandable and accurate terms their objective. It was a great sound bite. 

Cox and Wyden would make clear the internet was the essence of interstate commerce and that the United States Constitution is explicit in giving Congress and the federal government the duty to regulate any attempt by the states to restrict interstate commerce. Candidly, I thought some of the arguments they made for a moratorium on internet access were honest and believable. But then the e-commerce coalition dined out on the power of the “Don’t tax the Internet” phrase; it was the beginning of every sentence. They used it despite knowing that when used in conjunction to collecting sales tax on e-commerce, it was simply false and deliberately misleading. Sales tax is not a tax on the internet itself. 

Their second argument was “Do not kill this industry in its infancy.” They pointed to the internet as an exciting new medium that could transform the United States economy. Left to their own devices, they argued, local and state governments would tax the internet to death or make it so expensive only the rich would be able to use it. Senator Wyden told a hearing on a bill proposed by Senator Dale Bumpers of Arkansas, “They want to go out and collect taxes on the Internet because they see the Internet as a cash cow.”(10)

Once again, this argument is nonsense. Their willingness to just ignore the falsehood of the arguments to exploit a good sound bite was also illustrated by their continual allegation that collecting a sale tax that was owed but had not been previously collected was “a new tax.” To me that is like saying a person guilty of tax fraud is actually not a perpetrator but rather the aggrieved party by virtue of the government imposing a “new tax.” And that “new tax” wasn’t a new tax at all, simply the same tax that would be collected if the product was being sold at a retail store. 

“Modernize or streamline the sales tax system so everyone paid their fair share.”

Beyond their demagoguery with the phrase “Don’t tax the Internet,” the e-commerce coalition had a strong argument—complexity. The Quill decision of the U.S. Supreme Court handed this one to them on a platter. It was true; the complexity of the sales tax in 1998 was a burden to interstate commerce and had so many complexities it created serious economic friction. 

This was a challenge for the Tax Fairness Coalition, and we also lacked a concise, emotional, anti-tax soundbite. In fact, we carried an extra burden—explaining the sales tax. 

In every speech, debate, or media interview that took place, I had to explain the difference between taxing access to the internet and taxing sales that took place over the internet. Often, I found myself explaining to sophisticated audiences how sales taxes work. People did not understand that sale tax charges the purchaser or user of the goods, not the business collecting it. Explaining that businesses were compelled to collect sales taxes and remit them to one of thousands of different state or local governments was confusing. There is an old saying in politics: “When you’re explaining, you’re losing.” We were constantly explaining, and therefore it felt like we were constantly losing. Only after sufficiently educating an audience could we make our three basic arguments. 

A Level Playing Field for All 

The most powerful argument we had was simple fairness. It is a fundamental of tax policy that similar transactions should be taxed in similar ways. Because Amazon at that point in time was essentially a bookseller, and the best-known example of e-commerce, we often used the purchase of a book as an example. 

How could it be fair to charge a local bookstore with the obligation of collecting sales tax and not require it of Amazon? It provided the internet seller with a government-backed economic advantage if the price of a book costs 5 to 7 percent less money. It was also unfair that those who bought over the internet were avoiding payment of their fair share for local law enforcement, schools, roads, and other services. I would use the book example, and then ratchet up the scale by asking how long it would take for people to start selling industrial equipment over the internet to avoid sales tax. 

Our second argument was generally the economic impact it would have on local governments and the likelihood they would be required to increase property taxes, their only other source of income. We also pointed to the impact on the brick-and-mortar retail sector. That sector employs millions of Americans. Making a selectively applied tax the downfall of the retail industry was bad economic policy. There needed to be a level playing field. 

When addressing audiences who might care about federalism, I would speak to the impact the loss of tax revenue would have on state and local governments’ capacity to provide services. Typically, I would reflect on the likelihood that the federal government would ultimately impose a national sales tax, and then they would be the ones to distribute it among the states. In this situation, states and local governments would by necessity become more dependent on federal money and federal decision making. 

In the final analysis, the e-fairness coalition messaging had to be about how the system could be fixed and preserved. It was impossible to defend the current complexities. 

When speaking to an audience of citizens, who just wanted the system to be fair and to provide the required services, I always spoke of the need to “modernize or streamline the sales tax system so everyone paid their fair share.” 

Sales tax offended people far less than income tax or property tax. We asserted that the same technology—computers, software, and the internet—used in e-commerce could also be used to create and make the sales tax system manageable and fair. 

The Internet Tax Freedom Act 

With the summer National Governors Association meeting behind me, and an organized effort under way among state tax professionals to figure out how to fix the system, I turned my attention to how the Internet Tax Freedom Act was being written. Bills were being written in the House and the Senate, and there were meaningful differences between the two. For example, the House wanted the bill to provide a six-year moratorium on taxing internet access, while the Senate was pushing for a shorter one. 

We had two overriding objectives in exchange for the governors supporting the bill. We wanted to be certain no language was added that could be interpreted to exclude the ability of the states to tax e-commerce to the degree allowed under the Supreme Court’s recent Quill decision. The second objective was ensuring the rules for establishing the proposed advisory commission were as close to fair as possible. Politicians rarely organize advisory groups for advice—they are usually created for cover. The key is to ensure that the makeup of the organization and the rules of the body will produce the outcome you want. 

This is what Representative Cox and Senator Wyden did. It seemed Cox and Wyden felt the governors could be a real impediment to ITFA. They concluded to enlist NGA support by taking our biggest concern, a moratorium on e-commerce sales tax, off the table and to offer the creation of an advisory commission to discuss what should be done in subsequent years. They had been seeking a ten-year moratorium, but the bill ultimately shortened the moratorium to three years. I do not have firsthand knowledge of their thoughts, but I assumed at the time—and to this day—that part of their willingness to agree to a three-year moratorium was to align with the first renewal of the moratorium with the conclusion of the Advisory Commission on Electronic Commerce (ACEC). Simply stated, their strategy was to get the core bill in place—with governors’ support—and then expand the scope and definition of the moratorium at the first renewal by pointing to a “recommendation” by the ACEC that the renewed bill should include a moratorium on sales tax on e-commerce. 

During the summer and fall of 1998, the NGA team and I focused intensely on influencing the shape of the Internet Tax Freedom Act as different versions worked their way through the House and Senate. We had begun to pick up a few congressional allies, mostly officeholders who had been former state officials, such as Senator Byron Dorgan, a former state tax commissioner in North Dakota; and Senator Bob Graham, previously a governor of Florida. Both were Democrats in a Republican-controlled Senate. Both Graham and Dorgan offered alternatives that were state friendly, but those bills were dead on arrival. We had to depend mostly on our relationships with Republican leaders and the threat that the governors would actively oppose the bill. 

NGA’s leverage in our discussions with the ITFA drafters never felt particularly strong. Any heft we had came from the sponsors’ concern that when governors and other state and local government leaders are passionate and aligned on a bipartisan basis, they can exert a lot of pressure on each state’s two senators. Most of the Senate had given the ITFA little thought at that point. If senators and their staff suddenly started hearing from every mayor, county commissioner, or state legislator in their state about this issue, it could make it difficult to pass. Cox and Wyden viewed this as a long project and did not want to start fighting state and local government. 

Wrangling Over the E-Commerce Commission 

We had gained enough traction to begin to put together a commission to discuss the tax problem. Joanne Neumann and I led a team from NGA that represented the governors in the project. However, negotiations on blue ribbon or advisory commissions and task forces almost always revolve around the same issues, the first being who will host or manage the group. The Clinton administration wanted to be the organizer, but the governors (NGA) pushed back. It had become clear to the governors that the president’s earlier endorsement meant he was all about gaining pull with the tech industry. We prevailed on that issue. 

The size of a committee or commission is important as well because it ultimately dictates the way various constituent interests get represented. In various versions of the bill, the number of seats on the commission was as high as thirty. However, in the final version of ITFA, only nineteen membership spots were authorized. I did not engage heavily in this discussion except to remind that the larger the group, the more complicated it is to manage. I knew there were only four things that really mattered: How the seats at the table were allocated among the various interests; who chose the members; how decisions were to be made by the commission; and the scope of the agenda. 

It was clear to me that the sponsors and writers of the bill set about to create a framework designed to produce an outcome they liked, starting with the allocation of seats. We fought hard to specify that eight of the seats would be occupied by state and local government representatives. The bill required one of those to be from a state without a sales tax, and another without an income tax. The issue of who would appoint the commission members was resolved by allowing the Clinton administration to appoint the three federal agency representatives, spreading the other sixteen choices among the majority leader of the Senate, Trent Lott; the minority leader, Tom Daschle; the Speaker of the House, Newt Gingrich; and the minority leader of the House, Richard Gephardt.(11) 

“Any recommendation agreed to by the Commission shall be tax and technology neutral and applied to all forms of remote commerce.”

It was on the question of how decisions would be made that Joanne and I won two critical concessions in the bill’s drafting. First, we insisted the bill require a two-thirds vote (a supermajority) of the members for a proposal to become a recommendation of the commission. This meant twelve of the nineteen commission members had to support a proposal. The second concession was a sentence in the law which states: “Any recommendation agreed to by the Commission shall be tax and technology neutral and applied to all forms of remote commerce.” It was also agreed there would be no proxy voting and members could not attend electronically.(12) 

Tom Griffith, a lawyer who served as counsel to the ACEC, said later in a speech at the Brigham Young University law school of these two provisions: “I suggest to you that those are significant restraints upon the types of recommendations the Commission can make. According to the drafters of the Act, the proponents of this language, who represented the NGA, wanted a guarantee that there would be no safe harbor and taxation for electronic commerce alone in any recommendation made by the Commission.”(13) The truth of Tom’s comments was demonstrated as the ACEC became operational. 

The final issue was the scope of the agenda. NGA argued for a more expansive agenda than the mandate provided in the bill. In retrospect, I am not sure why we did so. There was plenty to cover in the relatively short time available. 

One other issue related to the drafting of the ACEC—who would pay for it. It was always assumed during our discussions with bill drafters that the commission would be paid for by congressionally appropriated government funds. After passage we learned that the intended funding mechanism was to be private donations.(14) 

My experience with government-authorized task forces and commissions is not unlimited, but it is considerable. Maybe there are other examples where serious policy making was to be done by organizations funded by private donations, but I am unaware of them. I cite this development as evidence of what I consider to be the strategic intent of the bill’s sponsors and their allies. This was, from the beginning, about providing them cover to pursue the creation of a permanent moratorium on sales taxes related to e-commerce. 

I was incredulous when I learned about the funding of ACEC. I made clear in my capacity as NGA chair that governors had agreed to participate in a deliberate and orderly public process. Having a public policy process funded by industry donors was completely unacceptable and if government funding was not arranged, we would consider any product of the process as invalid. Agreement was reached among the parties that the Commission would ask Congress to appropriate the money. On their assurance it would occur, we would proceed. 

On October 21, 1998, Bill Clinton signed into law the Internet Tax Freedom Act. The bill summary published by Congress described the act this way: 

Internet Tax Freedom Act of 1998—Prohibits, for three years after enactment of this Act, any State or political subdivision from imposing, assessing, collecting, or attempting to collect taxes on Internet access, bit taxes, or multiple or discriminatory taxes on electronic commerce, with exceptions for: (1) Internet access taxes imposed under specified State statutes, provided that each State referenced enacts, within one year after enactment of this Act, a law to expressly affirm that such tax is imposed on Internet access; and (2) the provision of Internet access offered for sale as part of a package of services that includes services other than Internet access. 

Establishes the Advisory Commission on Electronic Commerce to: (1) study State and local taxation of transactions using the Internet and Internet access, examine model State legislation relating to the taxation of such transactions, and examine sales and use taxation on remote commerce and related issues; and (2) report to the President and the Congress proposed legislation reflecting its findings. Requires congressional consideration of such proposed legislation within 90 days after its receipt.(15) 

Tactics and Maneuvering 

Here is the rub: Of the eight state and local representatives, it was no accident that two of them had very well-defined views that comported with the views of Governor Gilmore. One was Commissioner Harris of Virginia’s assembly, and then Dean Andal, the tax commissioner from California, who just happened to support Congressman Cox’s position on the collection of sales taxes on e-commerce. 

Likewise, it was more than conspicuous that there was no representation from the traditional retail industry. The abundance of tech companies simply added to the lopsided nature of the appointments. 

Not surprisingly, Governor Jim Gilmore became the commission’s chair. He and his team hired the staff and organized the agendas. A committee was organized on workflow, but Gilmore appointed that body’s chair and the members. I was not naïve enough to be surprised by these outcomes. In D.C. power politics, the goal is to look as fair as possible while fully stacking the deck to the degree necessary to achieve a predesigned outcome. 

Once this commission had been chosen, the stacked nature of the panel became clear, and the importance of the supermajority requirement we got into the legislation became more evident. We had to find seven members to block a recommendation—not an easy task, and it was not immediately clear where they could come from given the stacking that occurred among state and local government appointments. We were working toward a minority victory, and I had a well-defined picture of what a minority victory looked like. The most important thing for us to do was assemble a coalition of sufficient size to block any recommendation that sales tax on e-commerce be added to the tax moratorium of the Internet Tax Freedom Act. 

As chairman of the National Governors Association, I naturally emerged as the leader of the state and local government coalition on ACEC. Tom Griffith, commission counsel, described me as having a “very active role on the Commission and . . . one of the more forceful personalities amongst a collection of accomplished people.”(16) My job was to play active, effective defense, and so Tom’s description was a diplomatic way of saying I played a version of hardball. At times I found the role uncomfortable, as I am not naturally an agitator. But in this case, I had to be. 

After the objective of blocking skewed recommendations, the second objective was to discredit the ACEC as an independent body. This was not a disinterested body just looking for the best solution, and we needed to highlight just how flawed the process had been. 

There was no doubt that the nature of the ACEC was gaining ground as an issue and there would be a lot of attention paid to the panel. Therefore, our third objective was to use this ACEC process as a means of educating important constituencies about the imprudence of giving the e-commerce sector a permanent advantage in the retail marketplace. 

Finally, I needed to demonstrate that it was quite possible to streamline the sales tax system in the United States and, gratefully, work was being done to achieve just that. The ACEC would provide a forum for proposals to be made and to show that serious effort had begun. 

ACEC Meetings Underway 

With the membership chosen, the commission was ready to begin operations. We were getting a late start really; the authorization and the funding had been in place since the previous December. We had to work fast anyway, given the statutory authorization of ACEC only through April 21, 2000. 

A workflow subcommittee proposed a work plan with four meetings. The first one was held June 21–22, 1999, in Williamsburg, Virginia; the second meeting would be held in New York City on September 14–15, 1999; a third meeting in San Francisco would convene on December 14–15, 1999; and the final meeting was scheduled for Dallas, Texas, on March 20–21, 2000. Teleconference meetings would be held between the first and second meeting and following the Dallas meeting. 

Because the meetings were captured on video, and a full transcript was made of each meeting, I will only summarize each of the meetings and share significant outcomes or capture a few vignettes that provide a flavor.(17) 

Meeting One: Williamsburg, Virginia, June 21-22, 1999 

The first meeting was held in Governor Gilmore’s home state on the afternoon of June 21 and all day June 22, 1999. Williamsburg, Virginia is the historic home of federalism. Many of the nation’s founding documents had a root there. It was the first time I had been back to Williamsburg since that pivotal week in November 1994 when, as leader of the Republican Governors Association, I convened the GOP governors and the new Republican congressional leadership to begin the process of moving power back to the states. The irony was not lost on me that we were returning to the same place to jump-start a process where Republican leaders were angling to limit states. 

The Advisory Commission on Electronic Commerce met at William and Mary College in an auditorium that first day. Commission members sat at a dais on the stage in an auditorium. The afternoon session was an organizational meeting. The transcript of the meeting makes clear that I was not about to accept a biased process.(18) The membership had clearly been stacked against state and local government interests in favor of a predetermined end, but we were not going to be finessed into accepting a phony outcome. 

Governor Gilmore had drafted a set of rules and devised a two-million-dollar budget without any input from commission members, as well as hired Heather Rosenker as executive director, the spouse of the Mark Rosenker, who was an officer of the Electronic Industries Alliance, a trade group who was at the center of advocacy of Gilmore’s position. 

I required a full discussion of the rules and procedures of the commission. The New York Times reported that Gilmore and I locked horns throughout the meeting.(19) The exchange seemed to be done politely but it was clearly awkward, especially when I challenged the hiring of an executive director consulting with the commission and made a point of her potential conflict of interest—with her sitting directly behind me.(20) Those things are never pleasant, and I don’t believe I’m particularly good at that kind of confrontation, but I needed to do it. 

We also discussed the funding issues. It was clear very quickly that I was not the only one uncomfortable with adopting a budget with no knowledge of where the money was going to come from. Gilmore casually suggested that the companies at the table were big, powerful companies with lots at stake. Surely, he reasoned, coming up with a few hundred thousand each would not be difficult. I immediately objected to any idea that the technology industry would fund a commission where they had such apparent conflicts of interest. The tech companies and other government officials expressed similar displeasure. It was clear that the commission would be viewed as bought and paid for by the industry. 

Governor Gilmore offered to have the state of Virginia pay for it. In fact, to his credit, he had put some seed money in to get the process started. Again, people were uncomfortable with that. The conversation continued into the next day and a committee was organized to develop a financial plan. Wisely, the committee went back to Congress, which ultimately appropriated $1.4 million to cover the costs. 

The next day, we followed an agenda, which called for us to formalize the commission and provided for a couple of scene-setter presentations.(21) Each of the members were given three minutes in opening comments. We all listened carefully to get a fix on where each commissioner was coming from. By that time, it was evident to me that to get seven commissioners to oppose the sales tax moratorium, we would have to gain the support of either the federal or public members. For the most part, each member’s comments reflected the perspective they occupied. By design I did not take three minutes but laid out my position in direct terms. From the transcript: 

I would also like to join in the celebration that is being expressed in this era, this Internet era, this powerful union, economic expansion, and I desire to see it assisted in any way. 

I want to make it clear I do not believe the Internet should be taxed. There should be no bandwidth tax, no discriminatory taxes. We ought not to be taxing access. We ought to be building it. 

However, those who choose to do transactions over the Internet should be treated with equality. I think that point has been made. Taxation should not depend on how people buy. 

I would also like to deal with what I feel are three realities of our work: The first is that we must, as has been stated, limit our scope. If we attempt to revamp the entire sale tax system in this country, that is a task beyond our capacity. However, we can undertake, at least in the area of remote sales, a radical simplification that is an absolute must if e-commerce is going to be a vital engine that is required for the 21st century. 

Time is our enemy. There is time in the life of every problem when it’s big enough you can see it but small enough you can still solve it. I believe that’s precisely where we are right now. We have to deal with this problem now. If we wait three years or five years, the course will be set, and we will be left to deal with the consequences that will shape themselves. 

Lastly, I would like to point out that given we are going to have to look at specific problems, we need to give them context but realize we’re not going to come up with the perfect solution. We should move forward looking for progress as opposed to perpetually deferred perfection. Thank you. 

As the first meeting closed, one had the sense that after months of delays, we got started, and that was about it. The members of the commission were known, but there was also a realization that the commission had very little time to complete its work. To deal with our constraint in time, a work plan committee was established by Governor Gilmore to narrow the topics we had capacity to deal with during the short time remaining under our statutory authorization. In a teleconference held on September 9, 1999, commission members heard the work plan subcommittee report. A transcript of the meeting reflects they proposed to deal with only three major issue categories: 

  • Local, State, and Federal Access taxes 

  • Electronic commerce sales tax issues 

  • International taxes, tariffs on electronic commerce (22) 

Further, they proposed the New York City meeting be used to listen to experts on all three subjects. In addition, commission members would be provided with written material for study. 

At the San Francisco meeting in December, there would be specific proposals made with the aspiration for substantive discussion among commission members to determine where there was agreement and where it could not be found. 

The final meeting in Dallas, scheduled in early March, would be where the final agreements were reached. Then, a drafting committee would put the report together for submission in advance of the April 21, 1999, deadline. 

The three topic categories the Work Plan Committee proposed were the obvious ones, but they were so broad it was going to be nearly impossible to explore them adequately. The dilemma added to my conviction that the Advisory Commission on Electronic Commerce was not a serious means of developing solutions but rather a means of justifying a policy position by the legislative organizers to give internet sellers a permanent advantage. However, I knew I needed to make the most of this commission and hope for the best; luckily, the three categories were helpful in organizing the second meeting of the ACEC. 

Meeting Two: New York City, September 14–15, 1999 

The agenda (23) and the transcript (24) of this meeting tells the story. We met at the Millennium Hotel on 44th Street in New York City. Our time was organized to hear nineteen separate presentations from a group of experts on the three topics isolated by the Work Plan Committee. Each of the presenters were to provide written material and would be allowed five minutes to summarize their thoughts. 

These were brilliant people and each of their presentations were full of credible data. However, as the day went on, I became increasingly unsettled by the randomness of the presentations and the lack of a cogent path to lead us to a constructive discussion on recommendations. Plus, there was another problem called Tropical Storm Floyd, which was moving up the eastern seaboard of the United States wreaking havoc. 

It was already raining as we started the meeting, setting the stage for the five inches of rain that would deluge New York City the next morning, closing businesses and subways and halting any hope of travel. We realized we had to get out of town and concluded to cut our meeting two hours short so we could leave. 

As the clock ticked toward our targeted 3:00 p.m. adjournment, my frustration caused me to interrupt the meeting. Directing myself to Chairman Gilmore, I—not so artfully—told a story and then used an analogy to propose a change in the agenda. 

I related how Gilmore and I met with the governors at our summer NGA meeting to discuss sales tax on remote sales. The discussion did not center around all the tax revenue we were missing; it was about whether the sales tax system we had as a country was adaptable to the new modern economy. I then related how, after I asked for volunteers, thirty governors volunteered to send their tax people to participate in a meeting to explore that question. 

Why is that important? I asked. It’s important because as smart as the people sitting at this table are, none of us know enough about the nuts and bolts of the sales tax system to know if what we’re talking about is possible. 

I continued by offering an analogy. Nearly everyone on the commission was a chief executive of a large organization of some type. How do we act in our roles as executives? We lay out a set of high-level aspirations—a vision of where we want to take the enterprise—then we say to the people who are more knowledgeable than we are to tell us how to do it, or even if what we want to do is possible. 

We had been hearing competing visions and perspectives, I suggested. I then proposed we spend thirty minutes describing the attributes or requirements of a twenty-first century sales tax system. Once we agreed on the specifications, we could turn to the experts and people running these systems to find out how to do it—or even if it was possible. 

I proposed that we organize our agenda in San Francisco around holding proposals up against our specifications. 

I suggested there were common themes that all the commissioners were expressing, things I felt we could unify around—fully acknowledging it was not a complete list. I offered seven.

  • Radically simplified system. “You can’t have 32,000 taxing jurisdictions. You can’t have a million different definitions.”(25) 

  • No new taxes on the internet itself. Remove the burden from the seller. 

  • No compromise in the privacy of the purchaser. 

  • Acknowledge the role of the states as a sovereign taxing authority. 

  • Treat purchasers of like goods equally across sales channels. 

I had been a bit awkward in the way I described my proposal, but it was good enough that people began to add criteria. Mayor Kirk said we needed to add technological feasibility. David Pottruck, the CEO of the online stock brokerage Charles Schwab, weighed in suggesting we should consult directly with technology vendors. Commissioner Sokul said international scalability needed to be a criterion. 

It seemed clear that others felt the same frustration as I did. Dick Parsons, the CEO of Time Warner, skillfully restated the proposal I had made and then expressed support for the idea. David Pottruck made a similar comment. A few more people made suggestions for the list. 

The final fifteen minutes of the meeting turned chaotic. The storm was settling in, people wanted to get out of town, yet we needed a direction for our San Francisco meeting. People were clearing up so they could leave. Others were still trying to get the floor. Some thought we needed a formal motion, others did not. 

Despite the disorder, in the final analysis, the commission adopted the proposal I made to develop a list of attributes the commission believed the sales tax system of the future needed to have. We agreed to refine the list and circulate it for a vote of commission members. We also agreed that at the San Francisco meeting we would invite groups, including state and local governments, to make proposals on how to accomplish our list of objectives. 

Meeting Three: San Francisco, December 14–15, 1999 

To my knowledge, the list of criteria the commission could compare plans against was never assembled. Basically, Gilmore and the staff he had assembled just ignored the action taken by the commission in New York. However, a request was made for proposals. Dozens were received and fourteen were chosen by the ACEC staff. 

Fortunately, the ACEC staff had the insight to include a plan that NGA and representatives from thirty states had developed at a meeting in Atlanta in September. The NGA proposal was titled the Streamlined Sales Tax Proposal. 

I did not want to present it since I was on the commission, so I prevailed on the governor of South Dakota, Bill Janklow, to present it on behalf of NGA. There was great symbolism in my request, in that South Dakota had been a party to the Quill vs. North Dakota case. Perhaps more importantly, Janklow was colorful, articulate, and scrappy. I knew he could and would engage with the commission. He did not disappoint. 

The San Francisco meeting was an endurance test. There were a total of twenty-five presentations that came in three groups: the presentations missed in NYC because of the storm, a ten-minute presentation from each of the chosen proposals, and finally, seven presentations from industry. 

The most important development to result from that meeting was not immediately apparent. It was Janklow’s debut of the Streamlined Sales Tax Proposal. Within a month, the states were committed to launch the sales tax project no matter what happened with the commission. 

There were some attempts to find agreement at the end of the meeting, but the commission was divided. However, we had only six votes; Gilmore and his tech coalition had ten votes; The federal agency votes were unknown. I feel confident Gilmore thought he had their support because President Clinton had endorsed the Internet Tax Freedom Act. However, at the time, I was not sure that was the case. I held on to that hope because those three commission members were our only hope of being able to prevent Gilmore and the tech coalition from recommending a permanent moratorium on sales tax on e-commerce to Congress. 

Intrigue Before the Final Meeting 

The final meeting of the Advisory Committee for Electronic Commerce was scheduled for March 20–21, 2000, nearly four months after the San Francisco meeting. However, the issue continued to occupy a lot of my time before the meeting. I had been personified as the opposition to Gilmore. There were speech requests, news interviews, and several one-on-one appearances where Gilmore and I were juxtaposed. The fact that we were both Republicans made it even more interesting. 

Not surprisingly, as the issue became more contentious, there was personal tension between us. My constant opposition clearly got on Gilmore’s nerves. Likewise, I must admit I found Jim Gilmore to be opportunistic and arrogant. Both of us were quite civil in public settings and in one-on-one interactions. However, civility had its limit and there were some exceptions. 

At the NGA mid-year meeting during my chairmanship, held in January 2000, I was conducting the governors-only meeting. The subject of taxation on e-commerce was a regular topic among the governors. Except for Gilmore and four others, the governors were in opposition to Gilmore’s position. As I raised the topic, Gilmore’s sensitivity overflowed, and he stunned everyone in the room with an outburst of personal anger toward me. It was so angry and personal that several governors who had not been particularly energized on the issue committed their support to me immediately after the meeting. 

“I’m here to represent taxpayers.”

It was not just Gilmore who came to resent me because of my assertive role on the commission. Political organizations need boogeymen, which allows issue organizations to personalize their antipathy. Clearly, I earned a role as Grover Norquist’s villain. In fact, I was the 1999 poster boy on Grover’s traditional Christmas card parody, which depicted me as a Santa Claus figure offering taxpayers a lump of coal in their stocking. I think I may have picked the role up at the New York City meeting of the commission. In the middle of one of his sanctimonious “I’m here to represent taxpayers” riffs, I asked Grover if he could help me understand the difference between a taxpayer and voter, because I was not aware of a time when he had ever been elected by anybody. 

As we moved closer to the March meeting in Dallas, members of the commission had heard very little about what exactly would be proposed; however, it was clear to me what the opposing side’s strategy would be. 

Gilmore and his coalition had used their control of the agenda to make a gabfest out of the first three meetings, with no firm proposals. This created a situation where Gilmore, Norquist, and the tech business caucus could cram through a series of recommendations at the final meeting because they would have the thirteen votes required for a supermajority. When the agenda arrived a few days before the meeting, it revealed exactly fourteen resolutions that represented only Gilmore’s point of view.(26) They could have been—and perhaps were—written even before the commission started its business in Williamsburg in July of the previous year. 

Only three commissioners sponsored all fourteen resolutions—Gilmore, Norquist, and Stan Sokal from the Association of Interactive Media. In Washington parlance this was set up to be a good old-fashioned showdown, and I’m confident Gilmore was feeling pretty optimistic and smug. He was about to get a surprise. 

A day or two before leaving for Dallas, I spoke with Andrew Pincus, who was the general counsel at the Department of Commerce. He had been the leader of the three-department federal team. Pincus told me it was evident that the Advisory Commission on Electronic Commerce had been orchestrated by Congress to produce a particular outcome. While the White House had instructed them to be supportive in ways that advanced e-commerce, they were also told that the president knew a solution for state and local governments needed to be part of the mix and that a balanced approach should be supported. 

Pincus then explained that the federal team had observed the degree of manipulation Gilmore and team had engaged in. They were offended by the fact that the process had been designed to produce an agenda supported only by Gilmore and his coalition—essentially ignoring the states. As a result, they had determined they would abstain from voting on all the resolutions except those they had sponsored. 

I was elated. I knew without the three federal votes Gilmore could not get to a super majority. This meant, under the law, that the commission could only report on the matters receiving a supermajority. 

I told Andrew Pincus that the states would use the leverage the federal agency members were providing by abstaining to see if we could forge compromise language that they could support. I still had some hope certain members of the business caucus would see the value of compromise. 

Meeting Four: Dallas, Texas, March 20–21, 2000 

The meeting in Dallas started with a greeting from commission member and Mayor of Dallas, Ron Kirk. I came to deeply appreciate Ron Kirk. He was direct yet measured, and had been a successful mayor since 1995. When his term expired in 2002, he was out of politics for a while and then ran unsuccessfully for the U.S. Senate. However, President Obama made him the U.S. Trade Representative in 2009. Ron became a stalwart ally and friend to me during the ACEC. 

The first matter on the agenda involved international issues raised by the federal agencies. Andrew Pincus used the opportunity to express his disappointment with the outcome of the ACEC and to announce they would be abstaining from any vote because of the one-sided nature of the process. As recorded in the transcript: 

COMMISSIONER PINCUS: Thank you, Governor. Yeah, I would like to say a few words, maybe generally, and then also specifically about this issue. 

I think the Commission has begun a national discussion of some very important issues. The president recognized the importance of these issues early in February ’98 when he announced his support for the Internet Tax Freedom Act and noted the importance of developing consensus on them. In accordance with that view that the interests of all stakeholders have to be taken into account, we’ve sought to work with everyone, making good faith attempts to achieve consensus within the Commission. And I have to single out Governor Leavitt, who’s the chairman of the National Governors Association, as someone who’s truly made Herculean efforts toward that goal. 

Unfortunately, the Commission has not yet been able to serve as a forum to forge that consensus. And we’d looked forward to supporting an overall package that would have reflected the views of at least two thirds of the Commission, as Congress required for a valid recommendation. And we’ve been working hard as an honest broker to try and achieve the balance that that requires between technology interests, state and local governments who have to provide services and the continued viability of traditional retailers, large and small. And we’ve been working hard talking to many members here about that. Unless the consensus develops, however, we’re going to abstain from voting. 

We remain open, however, to the possibility that a principle consensus will develop, and we hope before the meeting is over we can attract two-thirds consensus, but we do have views on the issues.(27) 

Andrew Pincus’s move, and his call for a consensus-building process, set into place a means for those two days in Dallas to result in a thoughtful, balanced product from the ACEC. Essentially, he said, if the chairman of the commission will play by the rules and seek to reach a balanced conclusion, we will enable the supermajority required. Otherwise, this commission will not be able to reach agreement on anything because the statute required a supermajority. 

My optimism lasted only moments. It is clear, in retrospect, that Gilmore, Norquist, and their lawyer, Tom Griffith, had anticipated that their agenda might not attract a supermajority vote and they had devised a plan to counter it. The transcript of this session (28) is worth reading because it is a classic example of how to use authority in an abusive way to manipulate results through process. Gilmore, with the assistance of his lawyer, simply overrode the rules and the requirements of the statute creating ACEC by using a flimsy logic and contrived tactics. It is a colorful debate in its entirety, which I will summarize. 

After Pincus made his statement, a commission member asked if that meant no proposal could be recommended by the commission, absent thirteen affirmative votes. Commission lawyer Griffith responded by saying the law required a supermajority, therefore that was true. However, the statute also required the commission to report its activities. He interpreted that to mean that if the commission wanted to report matters gaining only a majority, there was nothing preventing them from doing so. 

Governor Gilmore followed with an absurdly arrogant action. He declared as chairman he was ruling that the statutory requirement to report was more important than the supermajority requirement, and he ordered that majority votes be reported in the commission’s official report to Congress. He then magically produced letters from Senator Trent Lott, the Senate majority leader, and Speaker Dennis Hastert, who had succeeded Newt Gingrich as speaker, saying they would certainly like to hear what a majority of the commission thought. 

I challenged Gilmore’s authority to unilaterally make such a ruling. Gilmore claimed such power was granted under the commission’s rules because we used Robert’s Rules of Order. Not true, but it was meaningless to argue with him. 

Ron Kirk and I, along with others from the states and local governments, fought like lions against this ruling for nearly an hour. There was no logic to Gilmore’s position and the action totally misinterpreted the rules process. He was simply willing to do whatever it took to get his way. It represented a blatant breach of the integrity of the process. 

In circumspect, given the way the rest of the meeting went, and the way the report was ultimately written, the state and local representatives on ACEC should have simply resigned. However, Mayor Kirk was the meeting’s host and we still believed we could work with the business leaders to find a supermajority compromise. 

We worked late into the evening and all the next day trying to negotiate, but in the end, there was no agreement. We were very close at times, but Governor Gilmore and the business caucus wrongly concluded their cause would be better advantaged by submitting exactly what they wanted. Democracy rarely rewards that kind of behavior in the long run. 

One week later, Gilmore hosted a phone call to discuss the report with members of the Commission. I attended the call but said nothing. To my knowledge there was never a vote on the final report. 

End Game 

The formal report to Congress by the Advisory Commission on Electronic Commerce (29) was a sham, just plain phony. However, it was exactly what Jim Gilmore and Grover Norquist set out to create. It was designed to be a cover for their desire to legislate a permanent market advantage for e-commerce companies when the Internet Tax Freedom Act was reauthorized in 2001. The panel membership was stacked to create that result, and then the rules were not bent, they were broken. The panel was a waste of taxpayer money and provided little value toward actually finding a solution to a significant problem. 

I am not alone in my harsh analysis of Gilmore’s commission. On March 30, 2000, the federal representatives on the Commission issued a press release, saying bluntly, “The Commission became subject to procedural maneuvering to ensure that the only comprehensive proposal included in the final report was the one supported and offered by Chairman Gilmore and his coalition.” The release continued: “The report is unfair in its presentation of the results.”(30) 

Allison Shelton of the Public Policy Institute summarized reaction to the ACEC report this way: “Elsewhere the ACEC report was greeted withering criticism. Forty-two state governors signed letters to Congress opposing the report. State local governments claim that various new exemptions contained in the majority proposal, for items such as paperbacks and hardbacks, would cost them upwards of $30 billion annually if enacted. In the world of academia Charles E. McLure of Stanford gathered 100 signatures from academic tax specialists in a plea to ACEC to avoid special interest provisions. McLure characterized the academics letter as follow: “Basically, we’re saying that the thing that came out of Dallas is horrible.”(31) 

Despite this criticism, the Gilmore-Norquist alliance accompanied the publishing of their report to Congress with direct criticism of me. One article, published just before the ACEC report was released, screamed, “Governor Mike Leavitt to Internet Users: Drop Dead.”(32) The year 2000 happened to be an election year for me, and it was not surprising that opponents in both the primary and general election brought the issue up—but to no avail. I still won. 

Twenty Years—An Enduring Success 

Sales tax continued to be a very active issue for me. During the balance of the 106th Congress (1999-2000), a flurry of bills on the question of sales tax on e-commerce came in. Some of them contained proposals from the bogus ACEC report, others did not. 

In November 2001, the Internet Tax Freedom Act was due to expire. It was at this renewal point where proponents of the bill had planned to use the ACEC report to recommend that the moratorium language be expanded to include sales tax on e-commerce. Right on schedule, the ACEC report was trotted out by those who advocated for the sales tax moratorium. The report recommendations were incorporated into a bill sponsored by Congressman Henry Hyde, a conservative member from Illinois and chairman of the House Judiciary Committee. Gratefully, the bill went nowhere. However, in the end, the Internet Tax Freedom Act was extended again, this time until November 2003. The reauthorization included only the moratorium on taxing access and did not expand the law to include sales tax on e-commerce. 

I believe we succeeded in fighting off their proposals to include sales tax for three reasons: First, reaction to the ACEC report and its flawed process had been negative, and the ACEC process had also called attention to the consequences of its dubiously achieved proposals. Second, the retailers and local government groups finally began to make an effective case for fairness, particularly with members of the Senate. Finally, the states began to make discernable progress on the NGA proposal. 

In 2004, the moratorium was extended to November 1, 2007, by the Internet Tax Nondiscrimination Act. Still no sales tax prohibition. 

The Internet Tax Freedom Act Amendments Act of 2007 extended the moratorium on access taxation, this time for seven years until 2014. It also tightened some definitions and made other subtle changes. Still no action on sales tax. 

By 2014, when the next moratorium expiration date was approaching, a significant reversal had occurred in sentiment. Retail sales trends had dramatically changed as internet sales blossomed and traditional retailers began to fail. These two trends caused local and state governments to lose billions of dollars in revenues, throwing them in crisis. This was the exact outcome the state and local government representatives on ACEC had warned of. 

Suddenly rather than a sales tax moratorium, many in Congress began to support the Marketplace Fairness Act that would give states more power to require out-of-state internet sellers to collect sales tax on purchases. 

As Congress tried to extend the moratorium on taxing internet access, it was necessary to do several short-term extensions as they negotiated on the Marketplace Fairness Act. Finally, on February 24, 2016, President Barack Obama signed into law the permanent extension of the Internet Tax Freedom Act moratorium on access—but still no restriction on collection of sales taxes where nexus existed. 

While writing this history, I noticed a little nugget from Wikipedia in describing the Marketplace Fairness Act: 

In 2013 legislation, Virginia tied its gas tax rate to passage of the Marketplace Fairness Act or similar legislation by January 1, 2015. On that date Virginia automatically increased its gas tax rate by about 45% in order to partially cover the revenue shortfall from failure to pay tax on online sales shipped from out of state. The tax increase will automatically cease when federal legislation is passed to address this issue.(33)

The State of Virginia had been so hurt by the loss of sales tax revenue on e-commerce that their governor and legislature put into law that unless Congress allowed them to level the playing field by passing the Marketplace Fairness Act, they would automatically increase their gas tax by 45 percent. 

The Formation and Development of the Streamlined Sales Tax Project 

Going back in time, at the September 1999 meeting of the ACEC in New York City, during the somewhat dramatic moment when Hurricane Floyd was approaching, I referenced a group of thirty states I had organized in my capacity as NGA chair for the purpose of developing principles of a tax system that could be made to work. One week later, on September 22–23, the states met in Atlanta. Over two days, we sketched the future of a streamlined sales tax system. 

That meeting produced a set of principles, which we fleshed out to become known as the Streamlined Sales Tax Proposal—the same blueprint Governor Bill Janklow presented later at the ACEC San Francisco meeting. It was a highly substantive proposal, but it was voted down by the Gilmore coalition with virtually no discussion. 

When the commission issued its report to Congress—and Gilmore’s report writing team included all of his proposals even though they failed to meet the statutory threshold—the report did mention the NGA proposal. It had a section where each commissioner could make comments. In my comments I laid out the thirteen requirements for the sales tax system of the future that framed the proposal.(34)

It was evident to me and other state leaders that this was a matter of great importance to states and that we needed to become proactive in our pursuit of real solutions. To formalize our efforts the decision was made to create an ongoing group. In March 2000, I used my chairmanship at NGA to formally organize an alliance among many state government organizations called the Streamlined Sales Tax Governing Board. In an academic paper analyzing this effort, Alison Shelton summarized the core of the organization’s plan, saying: 

The National Governors Association (NGA) has developed a plan that would combine technology with tax simplification. Developed by Utah Governor Leavitt and others, the NGA’s “Streamlined Sales Tax System” would retain the existing nexus laws governing sales taxes, and hence would not impose new sales tax collection responsibilities on merchants. Under Governor Leavitt’s plan, the states would devote 6-7 years to an effort to harmonize and adopt the same product definitions and audit procedures. 

As originally proposed, the NGA proposal would relieve the merchant from all duties involved in collecting either the sales (in-state) or use (out-of-state) taxes. Instead, merchants would choose, voluntarily and free of charge, to transfer all responsibilities for calculating collecting, reporting, and paying the sales and use taxes, to a “certified service provider (CSP). The only obligation imposed on participant seller would be to integrate their computer systems with that of the CSP. The seller would not be responsible for determining the taxability of a transaction or handling tax monies and thus would not be subject to audit. The CSP would perform the sales tax calculations contemporaneously with the transaction so that the buyer would be informed of the tax collection before completion of the transaction. The states would assume all the costs of this system, contracting with the private sector CSPs to develop the necessary software. The way that states and localities reimburse CSPs could be negotiated—e.g., as a flat per transaction rate, a percentage rate, or a combination.(35) 

We believed the faster our progress in developing the Streamlined Sales Tax approach, the better our chances were of fighting off Gilmore and the technology vendors when they made the proposals contained in their phony commission report. By February 2001, the Streamlined Sales Tax Governing Board had significant, serious momentum. Thirty states were participating and had obtained authority to do so through an executive order from the governor or an act of the legislature. There were another eight states that were actively observing, which meant they did not yet have authorizing legislation but wanted to be part of it. Work groups had been developed and had started working on harmonization of rules, definitions, and data protocols. Serious progress was being made.(36) 

The credible start we had with streamlining sales taxes was important, and we referred to the progress often in meeting with members of Congress during 2001 to discuss the Internet Tax Freedom Act. It proved to be a significant factor ensuring that the moratorium in ITFA reauthorizations was limited to access. 

Supreme Court Settles It 

In November 2003, I resigned as governor to accept an appointment as administrator of the United States Environmental Protection Agency in the cabinet of George W. Bush. Even though I was no longer a leader of the sales tax changes, the policy fight over taxation of e-commerce and other remote sales continued. As previously reported, the Internet Tax Freedom Act continued to be extended, and in 2016 was made permanent, but only on access taxes. Sales taxes on e-commerce continued to be collected only under the conditions allowed in Quill Corp vs. North Dakota, which required physical nexus. 

Just as we had foreshadowed, e-commerce skyrocketed over the next two decades and the amount of sales tax collected on e-commerce to that point was a tiny percentage of what was owed. In 2012, states and local communities were feeling the predictable economic effects. The National Conference of State Legislatures estimated in 2012 alone the states lost more than $23 billion in sales taxes.(37) Every year, things became worse as e-commerce continued to grow. The Brookings Institution published a report showing that by 2018, sales tax revenues were dropping rapidly despite the fact that rates were increasing. This is exactly what we had warned would occur. 

From the point I resigned as governor in late 2003, the Streamlined Sales Tax Governing Board and various other state and local government organizations filled in whatever hole my departure left. They continued to lobby against policy that would make it legally difficult to collect e-commerce sales tax. 

The problem had become such a meaningful problem that several states passed laws designed to provoke a legal challenge aimed at overturning the Quill vs. North Dakota—fittingly dubbed “Kill Quill” laws. 

The first case to work its way through the legal process was referred to as Wayfair vs. South Dakota. It was argued in the Supreme Court in April 2018, and a decision was announced on June 21, 2018. The Supreme Court, on a 5–4 vote, overturned Quill, which meant that states could now compel e-commerce businesses to collect sales and use taxes.(38) 

The moment Wayfair vs. South Dakota was announced, the importance of the Streamlined Sales Tax Governing Board became evident. In the fifteen years since I exited the fight, the board had continued the hard work of building the technology and policies required to logistically get the job done. 

Just as we had envisioned in the late 1990s, the states that participated and pushed the Streamlined Sales Tax Agreement worked for years to align their tax codes. They unified around provisions that provided amnesty from past liabilities to those who would commit to operate through certified service providers. Our vision of equality over sales tax—and fixing the confusing sales tax laws—had finally come to fruition. 

In Retrospect 

The odyssey of the internet sales tax issue was remarkable, spanning two decades of commitment, maneuvering, tactical politics, and a refusal to abandon a principled stance—all playing out amid the tech revolution that swept the globe 

I first began to realize that the internet would bring a profound change to commerce, particularly retail, in 1998. Total remote sales at the time constituted less than one percent of all retail activity.(39) 

Then came the battles. The five-year window between 1998 and 2003 marked the political slugfest when a group of technology companies, in league with members of Congress and politically ambitious anti-tax advocacy organizations, fought to place a permanent moratorium on collecting sales tax for retail sales transacted over the internet—which would have given internet sellers a perhaps unassailable advantage over regular brick-and-mortar retail stores. 

More than twenty years later, I saw how my effort to level that playing field through sales tax collection on internet purchases played out, carried on by others—and how many of our predictions came true. Now, the percentage of all retail activity occurring online has increased exponentially. In 2018, online retail activity was 14.3 percent and by 2019 online transactions constituted 15.8 percent. In 2020, with the world reeling from a global pandemic, it skyrocketed to 21.3 percent of total retail within the United States.(40) 

Companies like Amazon, Google, Facebook, and Apple have become industrial giants. They are viewed now by many, including regulators and members of Congress, as having an unhealthy and unfair influence on society. They are accused of anti-competitive behavior, to the point that anti-trust investigations have commenced around the world. 

I think it not immodest for me to say that I was the national leader against the idea that the law should prohibit the collection of sales tax on e-commerce purchases by internet sellers. A close reading of news reports and the history of that period will bear that out. I did so despite my active efforts to make Utah a technology capital and in the face of substantial resistance from my own political party. I was fighting for two core principles—equitable tax policy and federalism. 

The Internet Tax Freedom Act, passed by Congress in 1998, left those selling goods and services in a physical retail setting with the obligation to collect sales and use taxes, but exempted remote sellers from the same burden. Had it continued to stand, significant harm would have been done to our systems of state and local government and our economy. 

A large amount of sales tax revenue was lost by states and local governments between 1998 and 2018, and they responded by shifting to other taxes and increasing rates. However, because internet sales would only continue to grow, states had strong incentives to improve their antiquated and inexcusably complex policies, laws, and technology. This boost in internet sales truly has moved us toward the development of a tax collection system that matches our moment. What we thankfully avoided—at least so far—is the development of a national sales and use tax system where the federal government collects the tax and Congress decides how it’s used. 

The explosive growth in internet sales has also allowed the retail sector to adapt. This sector employs enormous numbers of people. Jobs in retail are changing, and they must. But for the government to artificially fuel it by giving one sales channel preference over another would have distorted the outcome. Those changes are best accomplished by having consumers vote with their feet and wallets, not by preference-seeking industries and a preference-granting Congress. 

Big tech, as we have come to know them, are being questioned now for their anti-competitive behavior. Imagine what could happen, and what could have happened, if they had a permanent pass on sales tax collection. 

My role in conceiving of and fighting for a streamlined sales tax system is among the ideas, events, actions, and initiatives where I believe my public service made a lasting difference. But the effort was much different than the formation of a new online university, building highways, or hosting the Olympics, where tangible institutions or obvious benefits accrued. The internet sales tax saga was a fight to prevent shortsightedness. It is much harder to see, but I am no less satisfied by the result of my efforts. 



1. Vivian Lee and David Wessel, “The History and Future of The Retail Sales Tax,” Brookings, July 16, 2018.

2. Nexus means having a defined physical presence in the state such as an office, warehouse, or employees. Therefore, in the refrigerator example, both Illinois and California would have nexus because Sears had an office in one state and a warehouse in the other. 

3. In 2012, Sam Weller Bookstore became Weller Book Works and the store was moved to Trolley Square. “Store History.” Weller Book Works,

4. In 2006, the company America Online rebranded itself as Aol.

5. United States, Senate, Congress, and Committee on Commerce, Science, and Transportation, “Internet Tax Freedom Act: Report Together With Minority Views (to Accompany 2. 442),” U.S. Government Printing Office, Purdue University, 1998, p. 31–32, 91. 

6. John King, “Clinton Supports Moratorium on Internet Sales Tax,” AllPolitics, CNN, Feb. 26, 1999. 

7. “Deal Set on Internet Taxes.” CNN Money, March 19, 1998. 

8. Multistate Tax Commission, “Resolution 98-01: Interstate Sales Tax Collections,” August 7, 1998.

This resolution was repealed in 2002 and replaced with a new policy statement. “Resolution 2002-01: Improving State Sales Tax to Achieve Fairness and Simplicity,” 2002. This new policy statement more clearly defines the Multistate Tax Commission’s support of the states seeking equitable sales tax treatment and creating a streamlined tax system. 

9. Robert Boynton, “A Profile of Utah Governor Mike Leavitt.” Robert S. Boynton, August 14, 2000,

10. Associated Press, “Senate Defeats Internet Sales Tax,” The New York Times, October 3, 1998. 

11. Thomas Griffith, “The History, Purpose, and Procedures of the Advisory Commission on Electronic Commerce.” BYU Law Review, March 1, 2000, p. 158–159.

12. Griffith, 160 

13. Griffith, 160 

14. Griffith, 161 

15. Internet Tax Freedom Act of 1998, H.R.3529, 105th Congress. (1998). 

16. Griffith, 155. 

19. Jeri Clausing, “Internet Tax Panel Has a Rocky Start,” The New York Times, June 22, 1999.

20. Mike Sunnucks, “Group off to a Slow Start on E-Commerce Issues,” Washington Business Journal, Jun 28, 1999.

21. Agenda, First Meeting of the E-Commerce Commission, College of William & Mary, University Center; Williamsburg, Virginia, June 21–22, 1999.

23. Advisory Commission on Electronic Commerce, “Agenda: Second Meeting of the E-Commerce Commission,” New York, New York, Sept. 14–15, 1999. 

24. Advisory Commission on Electronic Commerce, “Second Meeting: Transcript of September 15,” New York City, New York, Sept. 15, 1999.

25. Advisory Commission on Electronic Commerce, “Second Meeting: Transcript of September 15,” New York City, New York, Sept. 15, 1999, p. 232, line 16–18.

26. Advisory Commission on Electronic Commerce, “Agenda: Fourth Meeting of the E-Commerce Commission,” Dallas, Texas, March 20–21, 2000.

27. Advisory Commission on Electronic Commerce, “Fourth Meeting: Transcript of March 20.” Dallas, Texas, March 20, 2000. 

28. Advisory Commission on Electronic Commerce, “Fourth Meeting: Transcript of March 20.”

29. Advisory Commission on Electronic Commerce, Report to Congress, April 2000. 

30. United States, Department of the Treasury, “Volume 380,” Press Releases of the United States Department of the Treasury (March 1, 2000 - March 31, 2000), p. 353.

31. Alison Shelton, “Should State and Local Government Sales Tax Apply to E-Commerce?” Public Policy Institute, AARP, 2001.

32. Americans for Tax Reform, “Governor Mike Leavitt to Internet Users: Drop Dead.” April 7, 2000.

33. Wikipedia, “Marketplace Fairness Act.” accessed February 20, 2021. See also: Portnoy, Jenna. “Va. Gas Tax Set to Increase After Congress Fails to Pass Online Sales Tax Bill.” Washington Post, Nov. 27, 2014. 

34. Mike Leavitt, National Governors Association, 

35. Alison Shelton, “Should State and Local Government Sales Tax Apply to E-Commerce?” Public Policy Institute, AARP, 2001, p. 22–23. 

36. Alison Shelton, “Should State and Local Government Sales Tax Apply to E-Commerce?”

37. National Conference of State Legislatures, “Collecting E-Commerce Taxes | E-Fairness Legislation,” November 14, 2014. 

38. Wikipedia, 15 January 2021, “South Dakota v. Wayfair, Inc.,”,_Inc.

39. The Census Bureau of the Department of Commerce, “Retail E-Commerce Sales in Fourth Quarter 2001 were $10.0 Billion, up 13.1 Percent from Fourth Quarter 2000, Census Bureau Reports,” United States Department of Commerce News, Washington, D.C., 2002. 

40. Fareeha Ali, “US ecommerce grows 44.0% in 2020,” Digital Commerce 360, January 29, 2021.


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