City manager challenges California gov on e-taxes

Responding to California Gov. Gray Davis' recent "do no harm" remarks in

favor of extending the moratorium on taxing Internet transactions, San Mateo,

Calif.'s city manager sent a letter to the governor detailing at least two

ways the lost tax dollars would hurt cities.

"For government to not require e-merchants to collect the same sales taxes

as traditional businesses is simply not fair and is not necessary to the

growth of e-commerce," Arne Croce wrote in the letter.

Croce also said that although the state is prospering from corporate income

taxes generated by Internet-based businesses, local governments do not see

any of that financial windfall. Davis said the state was "flush," thanks

to the corporate taxes.

"It is increasingly clear that the 1930s state and local government funding

system is ill-fitted to a 21st-century economy," Croce said. "If "California

is flush,' the first priority of the state budget should be to fully restore

the revenue taken from cities and counties in the early 1990s and to hold

cities and counties harmless for the loss of sales tax on Internet sales."

A spokeswoman for Croce said the governor's office has not reacted to the

letter yet, but a response is expected.