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Tech Industry

Net tax commission dissension may be growing

The Advisory Commission on Electronic Commerce, charged to advise Congress about whether to tax the Internet, may pass the buck back to the lawmakers themselves.

A federal panel charged to advise Congress on Internet taxation may pass the buck back to the lawmakers themselves.

In preparation for a Dallas meeting beginning March 20, panel members this week submitted their latest proposals, actually amending previous recommendations. The new proposals indicate the Advisory Commission on Electronic Commerce is even less sure of itself than previously thought.

Dissension in the panel ranges from Internet sales taxes to issues such as how to address the nation's so-called digital divide--between citizens who have access to the Internet and those who don't.

And in a possible foreshadowing of what is to come, one amendment would let members continue proposing changes both during the Dallas meeting and beyond--right up until the final report is written. The report is due to Congress on April 21.

"It could end up that no recommendations come out of the commission," said Fred Kiga, who works on the staff of commission member Gov. Gary Locke of Washington. "There are a broad array of proposals and so many moving parts."

Gov. Jim Gilmore Created by Congress as part of the 1998 Internet Tax Freedom Act, the commission comprises business and industry leaders, state and local government officials, and federal regulators. Although it met in Williamsburg, Va., New York and San Francisco last year, it has yet to vote on any recommendations to Congress.

The commission has been split between a faction led by Virginia Gov. James Gilmore and another led by Utah Gov. Mike Leavitt, both Republicans. While Gilmore's group has advocated banning all Internet-related taxes, Leavitt's crew has proposed modifying current laws to allow states to tax Internet sales and other online activities.

Gov. Mike Leavitt The recent proposals suggest that the chasm between the two groups remains wide. Among those proposals are:

• An amendment by Locke that would limit a proposed ban on Internet access taxes. Instead of the permanent moratorium originally recommended, Locke's amendment would extend the current ban on such taxes for a less definite period.

• An amendment by Locke which would require that any new system for collecting Internet sales taxes safeguard consumers' privacy. The previous proposal called for Congress to simply study how privacy would be affected.

• An amendment by Dallas Mayor Ron Kirk that would encourage Congress to continue to study the digital divide and encourage the federal and state governments to partner with private companies to increase access to the Internet. The original proposal blamed the digital divide on the cost of computers and Internet access and called for the elimination of telecommunications and Internet access taxes.

• An amendment by Gilmore, the commission's chairman, that would permanently ban Internet sales taxes. The previous proposal, submitted by a coalition of business leaders on the panel, would ban such taxes for five years.

The debate takes place as a growing number of consumers are spending increasing amounts of money online. E-commerce retail sales will grow from $38.8 billion this year to $184.5 billion in 2004, according to Forrester Research.

Last year, a study by Jupiter Communications indicated that the large majority of those sales are coming at the expense of traditional brick-and-mortar retailers. Many state and local government leaders fear that unless they are allowed to tax online transactions, their tax revenue will drop and they will have to cut services such as road building or education.

But a number of taxpayer groups and conservative leaders have scoffed at these concerns, pointing out that online sales still make up a small fraction of overall consumer spending. They argue that the economic growth associated with the Internet would be stifled by taxes.

Like most online stores, computer and electronics e-tailer collects sales taxes only in those states where it has a physical presence. Having to collect taxes nationwide would hurt in the short term, company president and chief operating officer Jeff Sheahan said. Not only would the Menlo Park, Calif.-based company have to set up a system to calculate taxes in the myriad of jurisdictions nationwide, it might also have to cut prices to remain competitive.

"My view is that we should leave the system the way it is now," Sheahan said. "Moving to a state-by-state tax system would become onerous and cumbersome, and it could choke off the new economy to some degree."

To become a formal recommendation to Congress, each proposal before the commission needs to receive the vote of two-thirds of commission members. But members of the panel and those close to it warn that a super majority may be difficult to achieve.

"We probably won't have two-thirds on anything," commission member Grover Norquist said. "There will be a simple majority for a vague anti-tax proposal."

But Norquist, who is also the president of anti-tax group Americans for Tax Reform, said that the lack of a formal recommendation may not mean much in the long run. Congress is moving in the direction of limiting or banning Internet taxes and even a recommendation by a simple majority of commission members may help it continue in that direction, he said.

"Congress is very amenable to the kind of stuff that we have been proposing," Norquist said.

Others close to the commission say that the panel may yet reach a compromise. A growing number of commissioners support the idea of simplifying state taxes, which can vary not only from state to state but from county to county within a state. Internet companies have argued that complying with the hundreds of different tax rates around the country would be overly difficult.

Other areas of possible agreement may be a repeal of the excise tax on telecommunications and a ban on tariffs on international e-commerce sales.

"There's great support for simplification and huge support for a ban on any taxes on Internet access," said one executive close to the commission. "If we have separate votes on those issues, we could easily accomplish a compromise on them."