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Net tax panel tries to negotiate consensus

The Advisory Commission on Electronic Commerce fails to reach a two-thirds majority on a compromise proposal to extend the present moratorium on new Internet taxes.

DALLAS--A congressional panel studying Internet taxes began the second day of its final meeting today not much closer to agreement than when it started.

As previously reported, the Advisory Commission on Electronic Commerce failed to reach a two-thirds majority on a compromise proposal to extend the present moratorium on new Internet taxes while state and local governments rationalize their tax regimes and fold in online levies.

A majority voted for the proposal, but state and local representatives and Clinton administration appointees held out. After much procedural wrangling, the commission recessed to negotiate behind closed doors.

"Everyone is working hard to try to reach a compromise," 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 panel's meeting here, which will conclude tomorrow, is its fourth and final assembly and its last chance to put together a report.

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 day, as a number of suggestions topped 50 percent but fell short of a ?supermajority.?

Negotiations centered on a proposal put forward by the so-called business coalition, a collection of corporate leaders that includes Parsons, AT&T chairman Michael Armstrong and Gateway chairman Ted Waitt. Floated in late January, the group?s suggestion tries to bridge the gap between conservative members who oppose taxing e-commerce sales and state and local officials who are loathe to concede revenues.

For the anti-tax commissioners, the proposal would ban a 3 percent federal excise tax on telecommunications, which dates back to the Spanish-American War, as well as Internet access taxes. But it leaves open the possibility that states will eventually be able to collect sales taxes on remote sales, as long as they first simplify their sales taxes.

It received only 11 votes, winning over both the business caucus and the anti-tax group led by Virginia Gov. James Gilmore, who serves as chairman of the panel.

Gilmore, Armstrong and Charles Schwab co-chief executive David Pottruck are representing the business caucus and the anti-tax faction in the negotiations. Utah Gov. Mike Leavitt, Washington Gov. Gary Locke and Dallas Mayor Ron Kirk represent the state and local officials.

Three Clinton administration appointees round out the commission and have said they will side with the panel?s consensus view. They effectively hold the balance of power, however. Absent these federal officials, the split is roughly 11 to 5.

Among the issues up for discussion are the excise tax on telecommunications; whether states would have to simplify their taxes before being able to collect on remote sales; and the arcane concept of nexus.

Under current law, companies are required to pay business activity taxes and collect sales taxes in states only where they have achieved nexus, or a physical presence. But in the Internet age, it's become increasingly difficult to know when a company has achieved a physical presence.

E-commerce leader, for instance, currently collects sales tax only in Washington state. But Amazon's Alexa subsidiary is based in California; it has distribution centers in Nevada, Georgia and Kentucky; and its Web store is available nationwide. Amazon's activities could make it subject to taxes in a wide range of states, depending on how nexus is defined.

The business caucus has proposed that nexus be limited to essentially a significant physical presence. Meanwhile, the state and local representatives have argued for a much broader interpretation of nexus.

Yesterday 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.