HomeMy WebLinkAbout1998-10-27 - AGENDA REPORTS - INTERNAL TAX FREEDOM ACT (2)AGENDA REPORT
City Maria
Item to be
NEW BUSINESS
DATE: October 27, 1998
SUBJECT: INTERNET TAX FREEDOM ACT
DEPARTMENT: City Managers Office
RECOMMENDED ACTION
City Council direct staff to participate in upcoming discussions at the federal and
state levels of government relative to sales tax on commercial transactions
conducted over the Internet and associated Internet issues as they may impact the
City of Santa Clarita.
BACKGROUND
The United States Congress is presently considering legislation that would create a
moratorium on any new Internet taxes for three years. Contained within this
definition is. a prohibition on state or local governments charging a sales tax on
items purchased over the Internet.
The Internet Tax Freedom'Act (HR 4105 and 5442) was originally] brought forward
by firms with strong ties to the future of the Internet as a mechanism by which the
fledgling Internet industry could grow relatively free from excessive taxation.
Nationally, jurisdictions at the local, state and federal government levels have the
ability to enact various forms of tax on the Internet. For example,) states like Ohio,
Connecticut and Texas have imposed a sales tax on information services. In some
cases, these charges include Internet access premiums on' Internet subscription
services, such as America Online. The State of California recently enacted AB 1614,
imposing a three-year moratorium on Internet access charges.
The Internet industry argues that by creating tax uniformity throughout the nation,
the Internet will be able to grow uniformly throughout the country. They further
argue that a state and local tax moratorium will enable the United States to be
globally competitive in the Internet marketplace.
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Of particular concern to many local jurisdictions throughout the United States,
including Santa Clarita, is the changing nature of retail sales colliding with
historical tax codes which are predicated on point of sales transactions. Under
current law, many catalog or other mail/phone order merchandisers avoid paying
local sales taxes based upon the fact that they do not have an established retail
presence in a given jurisdiction. For example, L.L. Bean does not have retail stores
in California and therefore, does not pay sales tax on purchases made by California
residents. With the advent of Internet retail transactions and simitar.application of
sales tax law, additional tax dollars will be lost to California jurisdictions. For
example, nationally, Internet sales are expected to grow from $8 billion annually to
$327 billion annually within five years.
Under existing law, California municipalities receive back 1% of the state sales tax
amount. In Los Angeles County the current sales tax is 8.25%.I Local retailers
argue that retail sales transactions over the Internet receive an immediate
competitive advantage equal to the sales tax amount on the same goods and services
available over the Internet and at local retail establishments. Furthermore, as mail
order and Internet retail sales transactions grow, local jurisdictions will suffer a
decline in sales tax revenues. For example, in Santa Clarita, FY 1998/99 sales tax
projections represent approximately $15,500,000 or 40% of our general fund
revenues. As sales tax is the City's primary revenue source, substantial growth of
Internet retail sales, while a convenience to local consumers, may fuel a reduction in
City revenues, potentially translating into service and program reductions.
Recent federal action in this subject area contains three major components. First, a
three-year moratorium is established which prevents state and/or focal jurisdictions
from enacting any type of tax on the Internet. Second, existing taxes on Internet
services, as already enacted in eleven states, but not California, will be allowed to
stand during the moratorium period. Finally, a commission will I be appointed to
study the issue of sales tax on commercial transactions over the Internet.
While local government advocates, including the City of Santa Clarita, argued
during the recent Congressional deliberations that any moratorium was hurtful to
local businesses, the Congress sided with those interests promoting competitiveness
in a global economy. Local government advocates will be'actively promoting a
review of historic forms of taxation based upon point-of-sale transactions. Sales tax,
as presently levied, may no longer be an adequate revenue source for local
governments in a world becoming increasingly dependent upon electronic and mail
global purchasing trends.
The two federal bills are in a joint Senate/House Conference Committee at the time
of preparation of this report, having been passed by overwhelming majorities in
their respective houses. As this issue is under active consideration by Congress and
its dynamics change daily, staff will provide an updated status at the City Council
meeting.
FISCAL IMPACT
Unknown as to amount at this time. Anticipation of a negative impact on City's
sales tax revenue predicated on local consumer purchasing trends.
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