Internet Taxation Deadline Looms

Many assume that Congress will never tax the Internet, but some believe it will — and doing so would kill e-commerce. A storm of lobbyists gathers as an important Congressional advisory commission concludes its hearings today.

by Patricia Fusco ISP-Planet Managing Editor [March 21, 2000]

Final hearings are underway in Dallas this week while the Congressional appointed Advisory Commission on Electronic Commerce (ACEC) convenes for its fourth and final discussion about issues related to Internet taxation.

The Commission has until April 21 to submit any recommendations to Congress regarding e-taxes, but it requires a two-thirds majority from the 19-member panel before any proposals can be sent to Capitol Hill.

In October 1998, Congress enacted the Internet Tax Freedom Act, which immediately imposed a three-year moratorium on any taxes for Internet access or e-commerce sales over the Internet while the issues were debated and resolved. The moratorium is in place on Internet sales taxes until October 2001. The ACEC was asked to study federal, state, local, and international taxation and tariffs on Internet services and transactions. However, the commission hasn't produced any agreements or recommendations during its 9-month existence. It has caused angry debates over Internet taxation throughout the industry.

Republican Governor James Gilmore of Virginia chairs the commission. Gilmore's faction of the group is pressing for eliminating all Internet-related taxes. Not exactly a big policy surprise from the home state of America Online, Inc. (AOL).

Utah Governor Michael Leavitt is pressing for a streamlined state sales tax system, which would create a voluntary zero-burden sales tax collection system. Leavitt also has stated that the only way to obtain equal tax treatment would be to eliminate all sales taxes. Among US states, Utah relies relatively heavily on sales taxes:

States' reliance on sales and use taxes.
Source: California Legislative Analyst's Office (LAO)

In between the governors' factions is a business coalition represented one business executive from each of the following six companies: AT&T, Charles Schwab, AOL, Gateway, MCI WorldCom, and Time Warner. (So the AOL/Time Warner merger gives the new company two votes?)

The business coalition wants provisions that fall closer to those supported by Leavitt's group, including a 5-year extension of the current Internet tax moratorium so states may simplify their sales tax codes and a nationwide standard can be established. It also proposes several changes friendly to telecom companies, including elimination of the phone excise tax and simplification of other telecom taxes. Again, not unexpected input from AT&T.

Put forward in late January, the business coalition's proposal has dominated the recent debate. But in order to become a formal recommendation, the proposal will require the votes of at least two of the other factions, and that's a lot easier said than done.

The National Governors' Association seeks to create a uniform sales tax system for sellers of all kinds and scraps the idea of developing a "trusted third party" sales tax collection system.

The NGA resolution would eliminate all taxes on Internet access and the purchase of personal computers, the 3% federal excise tax on telecommunication services, and would work to set a maximum sales tax for any taxable item purchased, either through bricks-and-mortar retailers or via the Internet.

Which brings us to the heart of the problem. Can state and local tax laws designed to produce revenue to support the local infrastructure of roads and access ways to traditional retailers apply to the Internet infrastructure? Those outside of the hearings are lining up to make their opinions known to the group.

On Monday, the Association for Interactive Media and the Direct Marketing Association wrote a letter to Commissioner Gilmore opposing all Internet access and telecom taxes. They also oppose any additional taxes on Internet sales and want to sales taxes to be based on the physical location of the seller.

Meanwhile, Deputy Treasury Secretary Stuart Eizenstat called for states and local entities to develop simplified sales taxes within two years, to level the playing field between Internet and traditional retailers. The move clearly favors traditional retailer's complaints that the lack of taxation on the Internet offers online sellers an unfair advantage.

Although the Commission has a responsibility to provide some guidance to Congress on e-taxation issues, members of the Commission are still far apart on the most important questions.

Substantial compromises will have to be made by both sides if meaningful recommendations are to be made from deep in the heart of Texas. The issues addressed at the Dallas hearings will have historic implications for consumers, businesses, and all levels of government.

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