Net Tax System Needs Full Overhaul, Commission Urges

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NEW YORK - Despite a study that says sales will drop if new taxes are imposed on the Internet, the debate over how they will be collected in the new millennium is far from over, according to members of the Advisory Commission on Electronic Commerce.

The 19-member group - made up of industry representatives and local, state and federal government officials - met here last week for the second time since it was formed by Congress in October to study taxation on Internet transactions and access. The commission has until April to make its recommendations. A three-year moratorium on new federal, state and local e-commerce taxes expires in October 2001.

While the commission broke little ground about how Internet tax policy should be implemented, all members agreed that the current system needs to be overhauled and simplified before Internet merchants can collect taxes. The members also said that any new system should be scaleable and not hinder growth of the Internet.

The group agreed on a proposal by Gov. Michael Leavitt, R-Utah, which says members should formulate a checklist of specifications that would need to be passed and then ask the states and tax experts to make sure the system works technologically. He recommended that these experts and states present their papers to the commission at its next meeting in mid-December in San Francisco.

The checklist on proposed taxation systems should have several characteristics, including:

• Be simple.

• Add no new sales taxes.

• Remove the burden on the seller.

The system also should not compromise the privacy of anyone making a purchase, should acknowledge the role of states as sovereign taxing authorities, should have a level playing field so purchasers are treated equally, have international scalability and should eliminate multiple audits.

The meeting included presentations from industry representatives and government agencies. Gov. James Gilmore, R-VA, who is chairman of the commission, cut the meeting short because of Hurricane Floyd.

The commission has a particular challenge in devising a recommendation because its members are from opposite sides - the public and private sectors. A main point of contention is whether sales taxes levied on traditional purchases in stores should be imposed on similar Internet sales. Government agencies say taxes should be imposed because the taxes would bring extra revenue to their states. Most retailers would prefer to stick to the current system - charging sales taxes where they have nexus, which includes states where their companies are headquartered or where they have a retail presence. Retailers say tax collection for interstate sales would be difficult because there are more than 7,000 sales tax jurisdictions throughout the country.

George S. Isaacson, tax counsel for the Direct Marketing Association, New York, said the Net should be looked upon as a totally new medium where the old rules do not apply.

"The notion of taking an antiquated tax system, exporting it across state boundaries, imposing it on a new technology and believing that this can be done so in an innocuous manner is unrealistic," he told the commission.

Isaacson also said that electronic commerce - especially in regard to digital products and services - is borderless and instantaneous. By imposing new tax burdens on U.S. companies engaged on e-commerce, Congress may end up driving those businesses offshore or benefiting their overseas competitors.

Commissioner David S. Pottruck, president/co-CEO of Charles Schwab & Co., San Francisco, said his company uses online and offline strategies. If taxes are not levied on the Internet, "we are going to be in a world where people are going to try on a suit in a store that is $1,000 and then go home and order it over the Internet to save $70 in taxes."

Terry Ryan, tax director of state and local taxes at Apple Computer Corp., Cupertino, CA, suggested an origin-based tax system.

"Here, companies charge sales taxes with one rate, one set of rules, based on where an Internet business is located," he said. "There are no state sovereignty issues, no nexus problems because … you have a physical presence there, so there's no question about nexus."

Government representatives argued that sales tax is the single most important source of state tax revenue, accounting for $147 billion in revenue in 1997, and that tax-free e-commerce puts local merchants at a competitive disadvantage. They also argued that tax-free e-commerce transactions violate the principles of tax neutrality by taxing identical goods differently based solely on the location of the seller.

A resolution introduced by commissioner Grover Norquist, president of Americans for Tax Reform, was approved which recommends the U.S. Trade Representative favor a permanent moratorium on custom duties on electronic transmissions. The trade representative will present its recommendation before the World Trade Organization at its third Ministerial Conference in Seattle in November. The WTO is expected to extend a temporary moratorium.

Meanwhile, a study released by, Los Angeles, last week found that 75 percent of online buyers will buy less on the Internet if sales taxes are instituted there. The survey compiled feedback from nearly 7,000 online buyers. conducted the survey in a two-day period in August as part of a partnership with the Association for Interactive Media, Washington. While 38 percent of respondents said they had paid sales tax for an online purchase at some point, 88 percent did not pay tax for their most recent purchase, and nearly half would not have made their most recent purchase if it included tax.

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