Internet Tax Debate Continues in Texas

Should Congress ban Internet taxation forever, 'study' the problem over the next 5 years, or develop a streamlined sales tax system now? Will its e-commerce advisory committee be able to arrive at a consensus?

by Patricia Fusco ISP-Planet Managing Editor [March 22, 2000]

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

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

Persistent logjam
Monday the commission failed to ease the deadlock over several key proposals under review. Eight commissioners Monday informed the panel that they would abstain or vote against the current proposals to prohibit the commission from attaining the votes necessary to make a formal proposal to Congress.

At issue is the business caucus proposal, which seeks to continue the current Internet tax moratorium for five years while states and municipalities establish a consistent e-commerce sales tax standard.

Lead by AT&T Corp. (T) Chairman C. Michael Armstrong, the business caucus also wants to permanently eliminate existing Internet access taxes and the 3 percent federal excise tax on telecommunications.

The plan also would exempt from taxation anything sold on the Internet in digital form, like downloadable computer software, an electronic book or musical recording. The exemption would also apply to tangible equivalents, meaning no sales taxes on sales of books, compact disks, or movies.

In addition to Armstrong, the business coalition is comprised of six industry executives from Charles Schwab & Co. Inc., America Online, Inc. (AOL), Gateway, Inc. (GTW), MCI WorldCom, Inc. (WCOM) , and Time Warner, Inc. (TWX).

Not-quite-united front
Kent Johnson, KPMG LLP national partner in charge of e-tax solutions for state and local taxes, said 11 commissioners on the panel endorse the business caucus plan.

"Eight commissioners don't like it, 11 are in favor of the plan," Johnson said. "The eight commissioners announced they would abstain from voting, and debate ensued. The commission could still send its report to Congress, but it could not be considered findings or official recommendations."

Dallas Mayor Ron Kirk cast the sole vote against the business caucus proposal. Seven abstentions came from Utah Governor Michael Leavitt, Gener Lebrun, National Conference of Commissioners on Uniform State Laws former president, Washington State Governor Gary Locke, Delna Jones, County Commissioner Washington County, Oregon, and three Clinton Administration appointees.

Fiscal conservationists
Representing states' interests in nabbing their fair share of sales taxes from Internet sales over the Web, the group of eight is pressing to establish a streamlined state sales tax system now, which would create a voluntary zero-burden sales tax collection system.

Its estimated that sales taxes provide about half of states' funding for critical public services including road and highway improvements, public schools, and emergency services. At issue is when the states could tap e-commerce sales for necessary funding to keep their infrastructure financially sound.

KMPG's (KMPG) Johnson said only Maryland has been successful in garnishing its piece of the e-commerce sales tax pie.

"Ten to twenty states have e-commerce sales taxes in place. For the most part, it's a corporate tax that is enforced by state audits," Johnson said. "Most states don't bother collecting from individuals because it's not economical to do so. The companies simply build the cost of the states' e-commerce sales taxes into their goods and services, so consumers pick up the tab anyway."

Don't hold your breath
Johnson added that no matter what the commission concludes it may be several years before Congress can act.

"Don't hold your breath," Johnson said. "It's a multi-year process before anything is done in Congress, no matter what the commission recommends."

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.

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