E-commerce panel takes on tangled Web tax issues

The 19-member commission was created as part of the Internet Tax Freedom Act, which Congress passed in October, and is charged with studying the current and potential impact of taxes on Net access and e-commerce.

Chaired by Virginia Gov. James Gilmore, the commission's recommendations to Congress next April will no doubt have an impact on the entire Net industry as well as the ability of cities and states to milk revenues from the booming e-commerce sector.

"This is the most important initiative yet in the Information Age," said Don Upson, Virginia's secretary of technology. "The commission is going to determine how and whether e-commerce will be taxed, and the recommendations it makes will shape e-commerce and the future of the Net." The meeting is being held in Virginia.

The Net Tax Freedom Act set up a national three-year "time out" that prohibits the nation's 30,000 tax jurisdictions from applying "discriminatory" taxes on Net access and services and could apply to sales taxes and items sold online. The moratorium also "grandfathers" tax codes in effect before October 1, 1998.

Although the online industry strongly supported the Net Tax Freedom Act, now all eyes are on the commission. The body will study the effect of e-commerce on bricks-and-mortar retail businesses and local governments' ability to collect taxes on Net sales.

The commission already has been beset by controversy over its makeup. At one point, local leaders had threatened legal action unless the panel's membership was changed to give more weight to their interests. The membership now breaks down to three federal representatives, eight officials from state and local government or agencies, seven members of the high-tech community, and one consumer advocate.

No one is expecting any surprises during the two-day meeting: The commission is expected to take care of such housekeeping issues as setting up a charter. Members will hear presentations from government, technical, and academic experts about the implications of e-commerce on the economy, as well as the range of sales and use taxes throughout the country.

However, during future meetings in New York, Silicon Valley, and Austin, Texas, the commission is expected to start shaping a federal Net tax policy that, once approved by Congress, could end up applying to all remote sales operations, such as mail order.

"I think they have to look at all sellers...if they want an even playing field," said Carol Cayo, director of government affairs for the Information Technology Association of America. "Whatever standards are applied should be uniform, and should apply to goods sold online as those sold on Main Street."

Collecting and remitting sales taxes on items sold over the Net is a complicated task for merchants and consumers. This is further convoluted by Supreme Court decisions holding that states can't require out-of-state sellers to collect and remit sales taxes unless the sellers have sufficient nexus--such as having a physical location or employees in the state.

"If you're in California and you buy stationary at a store, that vendor is going to charge you the sales tax applicable to where you are, they aren't going to try and figure out where you live and how you're going to use the item, like they would have to do on the Net," Cayo added.

Many state and local officials are eager to come up with a solution--and fast. It's no wonder: With e-commerce revenues are estimated in the billions of dollars, cities and states want a piece of the pie.

The National Governors Association, U.S. Conference of Mayors and other groups are working on a uniform state law package now to deal with the issue of Net taxation. The plan should be ready by December, according to Frank Shafroth, director of state-federal relations for the NGA.

"There will be an effort by the state and local legislators to develop model legislation so we won't have to deal with the federal proposals," he added. "There some experiments going on now, and it will involve a lot simplification to remove a lot of the current burdens and risk liability for corporations do remote sales."

In other words, these lawmakers want to streamline the rules nationwide for what types of items are taxable and the instructions for remitting the taxes back to localities so it will be easier for companies with nexus to pay up.

Still, not all state officials are expected to support the plan. In the past, the governors of California and New York, for instance, have pledged not to support special taxation of Net taxes and services.