Internet Tax Debate Continues

Final hearings are underway in Dallas this week where the Congressionally
appointed Advisory Commission
on Electronic Commerce
is holding its final discussion about
issues related to Internet, e-commerce and telecom taxation.

The commission, appointed by Congress, has until April 21 to submit any recommendations to federal legislators regarding e-taxes. However, a two-thirds majority of the 19-member panel must agree to any proposal before it can be sent to Capitol Hill.

On Monday, the commission failed to eradicate 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, including 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 and 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).

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 Governor Gary Locke, Delna Jones, Washington County, Ore., commissioner and three Clinton Administration appointees.

Representing states interests in nabbing its 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 which would create a voluntary
zero-burden sales tax collection system.

It’s estimated that states receive about half of their funding from sales
taxes to provide critical public services including road and highway
improvements, public school funding 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 20 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.”

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 set to expire in October 2001.

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