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Federal panel calls for Net tax plans

A congressional panel is requesting Net taxation plans based on new guidelines it released that signal a growing consensus to protect the e-commerce sector from burdensome levies.

A congressional panel is calling for Net taxation plans based on new guidelines it released today that signal a growing consensus to protect the e-commerce sector from burdensome levies, while ensuring that when taxes are due, they are collected.

As part of a three-year moratorium on "discriminatory" Net taxes, the 19-member Advisory Commission on Electronic Commerce was set up last fall to study the effect of e-commerce on brick-and-mortar retail businesses, as well as local, state, and international officials' ability to collect taxes on Net sales. The panel's final report to Congress is due by next April.

The taxation debate is critical to the Net industry, especially e-commerce companies, which are expected to rake in $1.3 trillion by 2003, according to Forrester Research.

Although the Net is in no way a tax-free zone now--the Internet Tax Freedom Act "grandfathers" tax codes in effect before October 1, 1998--the panel's job is to ensure that the nation's 30,000 different tax jurisdictions don't pass unfair sanctions on Net access, services, and sales.

Today the panel released 18 criteria for proposed taxation treatments of e-commerce and remote sales, such as mail order. The guidelines are a sign that the infighting among the diverse panel members, who range from local tax officials to Net industry heavyweights, is starting to wane.

"The interests of the panel are starting to converge--everybody is against hurting this industry," said Ben Isaacson, who is executive director of the Association for Interactive Media" (AIM), which has a seat on the panel.

The format of the guidelines may have helped smooth the consensus process. The criteria are posed in the form of questions that leave much room for interpretation. While the adoption of the criteria appears to be a positive step toward compromise, the true outcome of the ongoing Net tax debate will not be clear until actual proposals are adopted.

As with mail order sales, collecting and remitting sales taxes on items sold over the Net is a complicated task for merchants and consumers. Overall, the proposals will have to address how to simplify the existing system of sales tax collection.

Ideas that have been floated in the past include having states adopt a so-called flat tax for e-commerce transactions nationwide, and clarifying in law that a company only has to collect and remit sales tax if they have a physical presence or "nexus" in a state or locality.

"That is one of the main criteria: that we want to make all the procedures in reporting and remitting sales taxes much easier," said AIM's Isaacson.

Some state and local officials want to maintain their ability to tax Net services, which is reflected in the panel's criteria. The National Governors Association, the U.S. Conference of Mayors, and other groups already are working on a uniform state law package to deal with the issue of Net taxation, which should be ready by December, according to the NGA.

Proposals to the commission are due by November 15, and will be evaluated at its meeting in San Francisco, December 14 through 15.

Based on the criteria, the goal of the panel seems clear: A simpler tax collection system needs to be put in place, but in no way should Net transactions and access be singled out for new levies.

"Should the commission ultimately decide to recommend a streamlined system for the collection of sales and use taxes, such a system will be evaluated in the context of the following criteria," the invitation for proposals states.

The commission also will review whether the proposal imposes any taxes on Internet access or new taxes on Internet sales, and whether it imposes a tax requirement that doesn't exist today. The proposals should note if they could be put in place internationally, as well.

The commission said its criteria should not be seen as an endorsement of Net taxation, however.

"The decision of the commission to use a specific list of criteria to evaluate plans to simplify state and local sales and use taxes should not be interpreted as a decision to adopt a plan to implement taxation of Internet-based transactions," the commission stated. "While these criteria should not be considered a litmus test, each criterion will be important to certain commissioners as they evaluate each proposal that is submitted."