Facing problems, Internet tax panel trudges on

The controversy involves how and whether to tax Internet commerce, which is expected to reach $1.3 trillion by 2003, according to Forrester Research. State and local governments fear growth in Internet commerce will drain sales from shopping malls and traditional retailers, causing a drop in sales taxes. This conflict, similar to a long-running fight over taxation of mail order sales, is proving difficult to resolve.

Faced with this outlook, the Advisory Commission on Electronic Commerce, which was to meet in New York today, may conclude that its best hope is to narrow the issues surrounding taxation of Internet sales, then give Congress a clear plan of how to proceed, analysts said.

"I hope that commission can approve, in the end, what the set of facts are and what the issues are," said James Lucier, analyst at Prudential Securities.

A unanimous report is unlikely, given that the commission represents interests as divergent as AT&T, America Online, the state of California, and a prominent Republican activist.

Virginia Governor James Gilmore, the commission's chairman, predicts it will outline options for Congress to pursue, and could reach broad agreement on several items, such as the need to prevent new taxes on Internet access and to keep Internet commerce overseas a "duty-free zone."

The trouble faced by the so-called eCommerce Commission was foreshadowed last week when a major two-year study of Internet tax issues failed to yield firm recommendations. The National Tax Association, which includes accountants, companies such as America Online, and local government groups, instead described the disputes between business and government leaders that led to the impasse.

Lucier and other analysts say a similar fate probably awaits the 19-member eCommerce panel.

"It's really a big task and they have a limited amount of time," said Karen Boucher, senior tax manager at Arthur Andersen in Milwaukee who worked on the NTA project. "If they don't have the personnel to put on it full time and limit the things you are looking at, you'll never be able to get the groundwork done to reach an agreement."

The commission convenes for its second meeting today, still struggling to emerge from the organizational stage, even though its report to Congress is due by April 2000. The commission's first meeting last June in Williamsburg, Virginia, was marked by disputes over staffing and money.

Last month, the commission asked Congress for $2 million to fund its work; Congress hasn't done that.

Congress last year created the commission--divided between industry representatives such as AT&T and America Online and government representatives--as part of a bill that imposes a three-year moratorium on new Internet taxes. Lawmakers acted after at least eight states, including Wisconsin and Connecticut, moved to tax Internet access services.

The commission is supposed to recommend solutions to several problems, perhaps the most daunting of which involves taxing remote sales such as those from mail orders.

States and local governments contend they lose $5 billion annually in sales taxes lost to mail order sales. They fear that the explosion of electronic commerce will further erode these tax revenues. Forrester Research estimates electronic sales will exceed $108 billion, or 6 percent of total retail spending, by 2003, although other analysts say the figure will be much lower.

Timothy McCormally, general counsel at the Tax Executives Institute, said two main factors brought industry and government together in the NTA project. State governments were looking at loss of sales tax revenue from mail order and Internet sales. Multistate businesses, on the other hand, wanted simplification in sales tax laws; there are 7,600 U.S. state and local government entities which impose a sales tax.

The business community, however, was split, because the sales tax issue affected service businesses differently from retailers of hard goods. "One thing that seems to work best for someone selling software works differently for someone selling tangible products," said Boucher.

Investors are monitoring the commission's deliberations in order to see whether these thorny tax issues are resolved. There's the potential the commission could find a solution to the vexing problem of taxing remote sales, yet many analysts don't think this is likely. Based on the commission's progress so far, and the history of these disputes, Lucier said he doesn't expect "much of a market impact" from the commission's final report.

"It just shows you the range of the problems," he added. "Short of fundamental tax reform, it's going to be hard to resolve a lot of this stuff."

Another analyst, Nilesh Shah of KPMG International, offered a more optimistic outlook, given that the commission is uniquely suited to reach a consensus. The commission includes the governors of Virginia, Utah. and Washington, along with corporate heavyweights such as AT&T's Michael Armstrong, Charles Schwab's David Pottruck, and MCI WorldCom's John Sidgmore. "Never has this issue been raised at this level," said Shah. "These are decision makers, in my mind." Copyright 1999, Bloomberg L.P. All Rights Reserved.