Net tax panel fails to reach broad consensus

A congressional panel studying Internet taxes closes its final meeting after reaching just two areas of agreement: privacy is good and the digital divide is bad.

5 min read
DALLAS--A congressional panel studying Internet taxes closed its final meeting today after reaching just two areas of broad agreement: privacy is good and the digital divide is bad.

The deeply divided Advisory Commission on Electronic Commerce met late into the night and again this morning attempting to reach agreement on weightier issues of Internet taxation. But the talks fell apart, and the panel couldn't get the two-thirds vote needed to make a formal recommendation to Congress.

"I'm disappointed that we haven't come to a position that a supermajority could rally around," commission member and Time Warner president Richard Parsons said.

Created by the 1998 Internet Tax Freedom Act, the commission has until April 21 to issue its report to Congress. The Dallas gathering was the panel's fourth and final meeting.

The commission members agreed today to hold a conference call to try to work out broad agreements. The commission will not meet again.

For the panel to present Congress with a formal recommendation, 13 of its 19 members must approve. That requirement was the subject of much contention throughout the two-day meeting, as a number of proposals topped 50 percent but fell short of a supermajority.

The commission reached a supermajority only on the privacy and digital divide recommendations.

Under the privacy proposal, the commission recommended that Congress study the privacy implications of any new system that might be put in place to broadly tax e-commerce transactions.

The digital divide proposal recommends that Congress allow states to spend surplus welfare money to give needy families access to computers and the Internet. The proposal also recommends that Congress and states provide tax credits and "incentives" to private companies that team up with governments to provide access to the Internet to libraries, schools and needy families.

Both proposals passed without a negative vote, but like almost everything at the meeting, they were subject to some controversy. The three Clinton administration representatives on the commission abstained from voting on either proposal.

Meanwhile, commissioner Gene LeBrun, the past president of the National Conference of Commissioners on Uniform State Laws, said the commissioners were hypocritical. He noted that they voted to recommend that states close the digital divide, but they also voted to urge Congress to effectively take money away from states that could be used to close that digital divide.

"I support the idea of this resolution, but it's inconsistent with some of the other actions that were taken by this commission," LeBrun said.

The commission reached a simple majority on several issues proposed by business representatives on the commission, including AT&T chairman Michael Armstrong and Charles Schwab president and co-chief executive David Potruck. Their proposal included:

  • an extension of the present moratorium on new Internet taxes while state and local governments rationalize their tax regimes and fold in online levies.

  • a ban on the 3 percent federal excise tax on telecommunications, which dates back to the Spanish-American War, as well as a ban on Internet access taxes.

  • a clarification of what constitutes nexus, or physical presence. Companies are required to collect sales taxes and pay business activity taxes in states where they have nexus; under the business proposal, activities such as having customers or a subsidiary that operates in a particular state would not constitute nexus.

  • a new commission that would oversee state efforts toward simplifying sales taxes.

    On Monday, it seemed achieving a majority opinion would suffice to advise Congress, based on encouraging letters from the Republican leaders from the House and Senate. "I would rather see from the commission a clear and unambiguous policy proposal that achieved majority support than a vague supermajority recommendation that can be interpreted in many different ways here on Capitol Hill," Senate Majority Leader Trent Lott wrote.

    But Senate Minority Leader Tom Daschle said the commission was required to reach a two-thirds agreement on proposals forwarded to Congress.

    Taking their lead from Congress, commission members sparred on the issue of the two-thirds requirement throughout the meeting, with LeBrun even suggesting that the state and local officials may sue the panel to prevent its report from being filed if they are not able to reach a two-thirds consensus.

    "It's been discussed, but no decision has been made," LeBrun said. "I think we're all very disappointed by what passed."

    The main sticking point that kept the group from reaching the supermajority was determining where an Internet company is physically located and doing business, referred to as a nexus. Online companies tend to favor a narrow definition while state and local governments argue that any physical presence which impacts infrastructure opens them to taxation.

    "This is really a simple debate," Utah Gov. Michael Leavitt said. "Do we want to create a permanent special privilege for retailers and buyers online so they don't have to pay for roads and schools while everyone else has to pay more?"

    But the business interests argued that they were not trying to get a tax break for themselves, since consumers usually pay sales taxes such as those on telecommunications and e-commerce sales. Meanwhile, Commissioner Dean Andal of the California Board of Equalization said that many states and the federal courts already recognize the nexus exemptions the business coalition was pushing for.

    "The safe harbors for nexus--all of them are existing law," Andal said. But he added, "they're not always honored in every state."

    Going into the meeting, there were four distinct factions. Led by Virginia Gov. James Gilmore, conservative commission members pushed for cutting current taxes on telecommunications and prohibiting future taxes on Internet sales.

    Ideologically opposed to Gilmore's group was the faction led by Leavitt, also a Republican. Including several state and local government officials, Leavitt's group wanted to give states the authority to tax e-commerce transactions and was concerned about states and local governments losing revenue due to tax cuts.

    In the middle was the business coalition, which put forward a compromise in January to bridge the differences between Leavitt and Gilmore's factions. The proposal gave tax cuts to the anti-taxers while holding out the promise that states could eventually tax e-commerce transactions.

    But a compromise wasn't reached, and instead of getting support from Leavitt, the business coalition and Gilmore's group acted as an 11-vote block throughout the Dallas meeting.

    The three Clinton administration representatives who abstained from voting said they would only support items with broad consensus.

    "If you look out at the world right now, the business caucus proposal has drawn the opposition of an overwhelming number of state and local officials," said commissioner Andrew Pincus, general counsel for the U.S. Department of Commerce. "This is not a partisan thing. It's bi-partisan."

    But the actions by the Clinton officials caused much consternation on the part of the business coalition and Gilmore factions.

    "This are tough issues," commissioner Stan Sokul said. "It would have been nice to have known how the administration felt on these issues."