Tilting Arizona laws to protect so-called bricks and mortar businesses from the invasion of e-commerce competitors is unwise, says a state official who has examined the issue.

In fact, says, Jeff Hatch-Miller, a former legislator and current member of the Arizona Corporation Commission, local protectionism would drive e-commerce jobs from the state.

There is a general feeling that Arizona is doing little to either advance or hinder Internet business, and that much could be done to enhance the state’s overall economy.

A study conducted last year by the Progressive Policy Institute gave Arizona low ratings for e-commerce. The report ranked Arizona 37th regarding state government’s role in helping or hindering Internet business. The Institute, based in Washington, D.C., bills itself as a research and education group that is a project of the Third Way Foundation Inc., a nonprofit corporation. Its Web site describes its mission as defining and promoting policies and an agenda for public innovation geared to the Information Age.

Sen. Dean Martin, R-Dist. 6, says, “Arizona laws are not written to protect brick and mortar businesses nor to discourage e-commerce. Arizona does have a use tax statute which requires individuals to collect and remit sales tax on purchases made out of state — over the Internet. However, it is rarely enforced.” Mr. Martin is a member of Information Technology Authorization Committee with the Government Information and Technology Agency (GITA).

John Kelly, former head of GITA and now with Intel Corp., says e-commerce intrinsically ignores state and local boundaries. “State laws are dependent on state and local boundaries,” Mr. Kelly says. “To the extent that our state law requires geographically specific regulation, such as wine sales, or they don’t allow reciprocity agreements with other states — for example, cosmetologist licensing, then yes, the state protects bricks and mortar.”

With regard to helping or hindering Internet business, Mr. Kelly says the state is guilty of “benign neglect.”

And Mr. Martin observes, “Arizona is pretty much neutral on the issue.”

Michelle Ahlmer, executive director of the Arizona Retailers Association, says she doesn’t know how state laws could be written to protect bricks and mortar businesses. Sales taxes laws affect local businesses and as a result help e-commerce.

“Arizona is not hindering e-commerce,” Ms. Ahlmer says. “Anything e-commerce wants to do — the door is pretty open.”

The association, which has about 1,400 members — half small businesses and half large retailers — favors a national project to streamline sales taxes. “It’s a big issue,” Ms. Ahlmer says. “The goal of streamlining is to protect local businesses, to give them an equal footing.”

Collecting Sales Taxes Is Voluntary

For example, she says, if a book is purchased online or from a local store, sales taxes should be collected. Currently 20 states have adopted an interstate agreement calling on remote sellers to collect sales taxes, but it’s voluntary. The multi-state agreement also provides for a simplification of tax code definitions.

Ms. Ahlmer says according to multi-state retailers it costs them more to collect sales taxes in Arizona, Colorado and Louisiana than from all other states combined. The reason: local options.

A small but illustrative example is a Twix candy bar. If a Twix is considered candy it’s taxed, but if it’s considered a cookie, it’s a food and isn’t taxed, she says. “We need one definition for Twix throughout the state,” she says.

Mr. Martin says the destination-based Streamlined Sales Tax Project (SSTP) proposals would be difficult to implement in Arizona because local cities define their own independent tax base.

“I strongly believe in streamlining the processes of complying with our tax laws,” Mr. Martin says. “The fact that Arizona has a different tax base, city to city, county to county, makes tax compliance very difficult and expensive for brick and mortar businesses in Arizona with multiple locations. However, I do not support new taxes on the Internet or on e-commerce.”

The senator believes the SSTP “should consider switching from a destination-based sales tax system, which is very complex and prone to privacy issues, to an origin-based system, which would be much easier to implement in Arizona and would provide national competition on state tax rates to the benefit of consumers.”

Mr. Hatch-Miller says he doesn’t oppose states having common definitions. “A sandal should be a sandal and a shoe should be a shoe,” he says. “I’m in support of consistency. In terms of taxation over the Internet, we have to treat all businesses equally, whether you buy a pair of sneakers by mail order, at a swap meet, at J.C. Penney or the Internet.”

He describes sales taxes as “fees that locals assess on themselves to pay for local services.”

Lawmakers’ Recommendations

Mr. Hatch-Miller believes Internet sales tax should be assessed where the buyer, whether a business or an individual, is located. That’s the conclusion of a Joint Legislative Study Committee on Internet Issues, which Mr. Hatch-Miller headed three years ago. The committee also recommended that:

• It is not in the best interests of the state to favor out-of-state remote sellers over in-state remote sellers and in-state brick and mortar businesses, nor would it be fair to those businesses that have invested in the state.

• Sales should be taxed, but not the use of the Internet itself.

Collecting Internet sales taxes can be tricky. The committee stated: “Merchants are very concerned that extending the current tax system to the Internet places the onus of tax collection on them. The burden of complying individually with almost 7,500 individual taxing jurisdictions in the United States alone is daunting. A new system is needed where the burden is lifted from the seller.”

Mr. Hatch-Miller says the credit card industry could institute a program that would identify the location of the purchaser and allow for the processing of a tax. “It can be done very easily,” he says.

Todd Bankofier, president and CEO of the Arizona Technology Council, an advocate for tech companies, says the council’s position on e-commerce is that of “a non-taxable environment to encourage online commerce.” He says Arizona law has been friendly to brick and mortar businesses and the Internet “because we are a business-friendly state.”

“The state advances Internet business where it can,” Mr. Bankofier says.

Even so, Mr. Bankofier says it’s not as easy for vendors to do business with the state electronically as it should be. “It’s not as successful as we’d like it to be,” he says. “Electronic bonding is not as advanced as it should be in our state and local governments.”

Mr. Martin believes: “Arizona has made great strides in past years to make more documents available over the Internet, such as RFPs (Request For Proposals), and has made it easier for consumers to use state services, such as obtaining driver’s licenses. However, I believe we can make the state procurement and bidding processes more competitive and open by putting more of it online.”

Internet Friendly State?

How user friendly is the Internet for Arizona consumers? The Progressive Policy Institute study found that Arizona, California, New York and Texas score relatively low for Internet friendliness. “These are places that may be friendly to companies developing advanced technologies, but ar
e not very friendly to consumers going online,” the Institute states.

Mr. Martin says he has not checked the statutes, but believes that wine, insurance and prescription drugs are not available to Arizonans via the Internet. Cars can be purchased through e-commerce and so can mortgages, but only if obtained from an Arizona licensee, he says.

The brouhaha over wine is spilling across state lines. For Arizonans to buy wine from an out-of-state winery, Arizona law provides for a three-tier process. The out-of-state producer sells to a licensed Arizona wholesaler who sells to a retailer who sells to consumers.

Mark Brnovich of the local Goldwater Institute says “this protectionism may be harming Arizona’s wine industry.” Because of Arizona’s prohibition against direct shipping, 13 states bar their residents from ordering Arizona wine, he says.

Although the Progressive Policy Institute urges the repeal of state laws that hinder online sales of, for example, wine, it says states should not abolish legitimate consumer protection regulations.

“For example, it is appropriate for state laws to require that online wine sellers collect and remit sales taxes and use shippers that check for identification,” the Institute says. Checking for identification could involve making sure the purchaser of wine is of legal age.

Mr. Martin says national licenses could assist e-commerce by eliminating state-by-state regulations, but there’s a drawback. “I think that it would be an infringement of Arizona’s Tenth Amendment rights to self-governance,” the senator says. “However, Congress rarely has a problem trampling our Tenth Amendment rights on a regular basis when special interests are involved.”

On the question of national licenses, Mr. Kelly says, “Reciprocity agreements between jurisdictions make more sense so that among states there can be a minimum baseline standard of oversight.”

With regard to spam — unsolicited commercial e-mail — Arizona appears to be getting ahead of the curve. Mr. Martin says, “I led a bipartisan coalition last session that passed S1280, which provides Arizonans with the tools to fight back against unsolicited commercial e-mail, and it authorizes the attorney general to prosecute spammers and those who send viruses, while protecting victims of virus attacks.”

However, Mr. Kelly, former head of GITA, says no state law can truly be enforceable on this matter. “There is no entity that I know of that has taken the responsibility to educate the public about what they can do to reduce spam.”

Mr. Kelly recalls that during the late 1990s Arizona passed laws intended to set the stage for the growth of e-commerce.

“Among these, he says, were laws that gave legal equivalent status to digital signatures relative to ‘wet’ signatures; laws to allow state agencies to accept credit card payments over the Web; and a law designed to start the development of an electronic notary system. All these laws kept Arizona at the forefront of policy changes to promote e-commerce. Implementation beyond that has been a little less spectacular. While there are good examples of success, like the state Motor Vehicle Division online registration system, the electronic notary system hasn’t really taken off.

“Arizona does little to promote the use of e-commerce or the companies that engage in it. Meanwhile, under this opaque cover, Arizona stands as a leader in telemedicine and e-learning.”

For example, the Arizona Telemedicine Program is described as “a large, multidisciplinary, university-based program that provides telemedicine services, distance learning, informatics training, and telemedicine technology assessment capabilities to communities throughout Arizona.” The program Web site says it has created partnerships with not-for-profit and profit health care organizations, and has created new interagency relationships within the state government, and “is creating new paradigms for health care delivery over the information superhighway.”

Last year, GSPED, the Governor’s Strategic Partnership for Economic Development, recognized e-learning — obtaining education via the Internet — as the state’s 12th industry cluster.

Mr. Kelly says efforts to make it easier for vendors to use the Internet to do business with the state are faltering. “The state has attempted to develop an online procurement system,” he says. “However, it is, in my opinion, simply an electronic version of a flawed system. The state procurement process is broken — particularly in the area of contract management once contracts have been awarded. They have lagged other states in pursuing online auctions for the procurement of commodity products. They do not effectively post procurement opportunities. They do not accept electronic RFP responses.”

Mr. Kelly says elements of e-commerce are still emerging. “Arizona has probably done the most to promote e-commerce in the last five years,” he says. “The state has fewer restrictions. Wine sales is an issue, but a lot of things are sold over the Internet without any specific restrictions.”

Mr. Martin sees e-commerce as an international phenomenon. “It is a global issue,” he says. “E-retailers can just as easily move out of the country. I believe we should look at helping our local brick and mortar businesses by making it cheaper and easier for them to operate in Arizona. We can do that by lowering both their property taxes and eliminating their business personal property taxes that make it expensive for the brick and mortars to exist.

“However, I do not support protectionist legislation, where government would pick winners and losers in the marketplace.” —