Tax panel shows business-government rift

At issue is how online commerce should be taxed, and the battle lines are clearly drawn. State and local government officials back the interests of bricks-and-mortar retailers, while e-commerce firms advocate nurturing the Net through minimal taxation.

The 19-member congressional advisory panel is charged by Congress with examining the effects that taxes, tariffs, and bureaucracy have on e-commerce sector. The panel is expected to issue its final report to Congress by next April.

Congress created the Advisory Commission on Electronic Commerce under a law enacted last year that put a three-year moratorium on any new taxes on Internet retailers.

AT&T chief executive Michael Armstrong, a commission member, argued that any new taxation must be accompanied by simplified tax jurisdictions--a theme echoed by the e-commerce faction.

"My company fills out 39,000 tax forms a year--that is one every 3.5 minutes," said Armstrong, adding that the commission has the potential to simplify the issue.

But others are worried not about simplicity, but of declining sales tax revenues for state and local governments as an increasing number of shoppers turn to the Net rather than drive to Main Street.

Ron Kirk, mayor of Dallas, Texas, and a commission member, argued that sales taxes are needed to pay for municipal services that are often taken for granted .

"We live in a world where people want schools, roads, fire departments, and police services for free," said Kirk. "But they aren't [free]. They cost money."

Kirk added that most cities are worried that technology will put them at a competitive disadvantage by threatening the existing tax structure.

Recent studies indicate that e-commerce will be big business, but so far has had a minimal impact on tax revenues.

A study released yesterday by Ernst & Young estimated that sales and use taxes not collected in 1998 from Internet sales added up to less than $170 million. This figure, the study said, represents only one-tenth of 1 percent of total state and local government sales and use tax collections.

"The numbers seem realistic, but are still not adding up to much," said Austen Goolsbee, an associate professor at the University of Chicago School of Business, spoke at today's meeting. "Revenue would have to grow at multiples of up to 80 percent for the next 4 or 5 years for there to be a substantial loss from sales taxes."

Goolsbee noted that in the 1980s, Congress made a push to collect taxes from catalog sales which are taxable but untapped because of the complexity of complying with 40,000 jurisdictions.

"What brought the issue back on the table is the growth rate at which e-commerce is growing," said Goolsbee.

By 2002, Internet retail and travel sales are expected to grow to $41.1 billion, according to research firm Jupiter Communications.

"The growth rates are significant, but we're not yet at a point where the Internet is more than a blip on the radar," said Jupiter analyst Ken Cassar. "It's my opinion that government bodies should be watching this issue. Significant tax revenue opportunities will be lost if they don't decide how to legislate it."

Peter Merrill, a principal with PricewaterhouseCoopers, speaking at the meeting, noted that while all eyes have turned to business-to-consumer e-commerce, the focus should be on lucrative business-to-business sales, which are subject to taxes.

According to a Forrester Research study, business-to-business sales will account for more than 85 percent of all e-commerce sales in 1999. The sector is also projected to grow much faster, reaching 90 percent of e-commerce by 2001.

As sundry facts and figures are bandied about, Theodore Waitt, chief executive of Gateway, hopes to balance divergent interests represented at the meeting. Gateway sells its computers over the Internet as well as at its bricks-and-mortar shops.

"We have to try to get around the overwhelming number of tax jurisdictions while making sure local and state revenues are not jeopardized," said Waitt.