US 'Net tax commission wraps up for '99

The US commission charged with solving the puzzle of Internet taxation ended its meeting last week searching for an answer to the question of whether all businesses on the Internet should collect sales taxes.

The US commission charged with solving the puzzle of Internet taxation ended its meeting last week searching for an answer to the question of whether all businesses on the Internet should collect sales taxes.

While the commission remains deeply divided on the issue, members could do little more than argue their cases with rhetorical flourish. Commission members acknowledged there is a lack of hard facts and numbers that can show what would happen to the economy if taxes were or were not collected.

"Why wouldn't it be smarter to give it a three-year or four-year break before we conclude for sure that it should never be taxed or that it should be taxed?" said commission member John Sidgmore, vice chairman of MCI WorldCom and chairman of UUnet Technologies.

Sidgmore said he believes freeing Internet merchants from tax-collection obligations will hurt Main Street companies. But he said definitive conclusions remain out of reach.

The Advisory Commission on Electronic Commerce could recommend to Congress that it extend the current three-year Internet tax moratorium, approved in 1998, that prohibits states from imposing new taxes.

In addition to the moratorium, current law prevents states from imposing tax-collection obligations on companies that have no substantial physical presence within their borders.

Ted Waitt, chairman and CEO of Gateway, attempted to provide some evidence of the impact of taxes on electronic commerce. He said his company recently stopped collecting sales taxes in some states where it determined it had no obligation to do so. He said both phone and Internet sales increased as a result.

But Waitt also said not collecting sales taxes could widen the digital divide, the gap between families that own computers and have Internet access and those who don't. Only those with computers would have access to all the tax-free purchases.

In November, Gateway refused credit to some 250,000 families seeking to purchase PCs. According to a survey the company did, many of the people wanted the computers for their children. "They don't have credit cards, so they're not going to be large e-commerce purchasers. And if we're giving the Internet an exemption in terms of sales taxes, we do run the risk of widening that gap," said Waitt.

The commission will hold its final meeting in March and deliver its report to Congress in April. It will likely agree on some issues. The final report may conclude that the sales tax system is far too complicated, burdens businesses and needs to be simplified. The commission is also expected to oppose taxes on Internet access.

But the big issue, collection of sales taxes by remote vendors, remains very contentious.

"We must recognise that the first law of taxation is: If you want more of something, tax it less; if you want less of something, tax it more," said Craig Winn, chairman of Value America., a Web-based retailer, who testified before the commission.

Winn said he believes a national sales tax -- something he said would be impossible to achieve -- is the only solution that would simplify tax collection for companies.

David Bullington, vice president of Wal-Mart Stores Inc., who also testified, argued that tax collections weren't as difficult as its opponents were making it out to be. But that was contested by commission member Dean Andal, chairman of the California Board of Equalization, the state's tax administering authority. He said Wal-Mart's lack of understanding of local rules resulted in a $3 million sales tax overcharge to customers at one California store.

"I think it's astonishing for a company like Wal-Mart...to make such a blanket statement that it is not difficult to comply with local tax rates," said Andal.

"If you were doing your job, why didn't you tell us about it?" shot back Bullington, who said he wasn't contending that tax collection was easy.

A plan backed by the National Governors Association and other governmental groups to have "trusted third parties" act as intermediaries to collect sales tax -- freeing retailers from tax-collection costs -- didn't win over major retailers, such as Federated Department Stores Inc., which owns Macy's, among other stores.

Frank Julian, a vice president at Federated, said errors made by those third parties could be blamed on the store, and that could cost customers. "Retailers will not participate in a system where there is a significant risk that they may lose customers if they do so," he said.

A proposal to end a 3% excise tax on telecommunications, first imposed to raise money for the Spanish-American War, drew opposition from Clinton administration representative Joseph Guttentag, a senior advisor at the U.S. Treasury Department. That tax raises $4 billion a year.

Commission Chairman Virginia Gov. James Gilmore, who is opposing remote tax collection obligations on companies, argued that the Internet should be treated differently.

"I just simply don't assume that because it's not being taxed, that would mean somehow it's privileged. I just don't start at the assumption that everything in America ought to be taxed," said Gilmore.

Gilmore said the Internet was giving small business unprecedented opportunity. "For the first time, small business, which is being squeezed out, has a chance to get out there and increase their market share," he said.

There were also practical reasons not to try to tax the Internet, including the "simple inability" of government to tax digitally delivered goods and services, said Gilmore.

Toward the end of the meeting, David Pottruck, president and co-CEO of Charles Schwab , expressed some frustration with the commission's effort. "I think the problem is clearly more complicated then I ever imagined it would be," he said.

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