Internet Tax Panel Close to Compromise

Compromise proposals began circulating this week among members of the Federal Advisory Commission on Electronic Commerce, signifying that the tax panel may reach a consensus by its April 21 deadline – something industry insiders did not think would happen.

“Everyone is kind of resolving down to a few key points,” said Stanley Sokul, a Washington-based lawyer and member of the commission representing the Association for Interactive Media, “and the most important point is that there has to be simplification of the state tax systems.”

The new proposals call for an extended Internet tax moratorium and suggest giving state and local governments an opportunity to reform their sales-tax structures.

The ACEC – a 19-member board consisting of industry and consumer groups and state and local governments – is charged with examining how a tax system should apply to e-commerce and making a recommendation based on its findings to Congress.

Thirteen commission members must reach a consensus. Currently, there is a three-year moratorium on new, special and discriminatory taxes on the Internet. In general, the commission is split between state and local government officials – who fear they will lose tax revenue for schools and other municipal services – and congressional leaders, anti-tax activists, business executives and a few local officials who think a lack of Net taxes has accelerated e-commerce’s growth.

Virginia Gov. James Gilmore, chairman of the ACEC, has submitted various proposals, two of which are most significant to marketers. One is a compromise with business panel members who recently proposed permanently banning sales and use taxes on digitized goods-such as software, e-books and videos – but not on other goods.

Like the business proposal – whose proponents include representatives of Charles Schwab Corp., America Online Inc., MCI Worldcom Inc., AT&T Corp., Time Warner Inc. and Gateway – Gilmore’s compromise proposal calls for a five-year moratorium on new tax measures and urges the adoption of a simplified tax system.

It also proposes, however, that after five years, Congress should ban all sales or use taxes – rather than just on digitized goods – and grant small businesses extra protection from sales-tax systems.

Gilmore’s second, more stringent proposal would ban new Internet taxes altogether and permanently. He is expected to offer that proposal first at the ACEC meeting in Dallas next month and propose the business compromise if it fails.

“I believe America should ban sales and use taxes on the Internet permanently, for all of the time,” said Gilmore, in a statement.

Another compromise proposal came from Utah Gov. Mike Leavitt, Washington Gov. Gary Locke and Dallas Mayor Ron Kirk, along with commission member Eugene Lebrun. These commissioners, who have led the fight to give states more tax-collection power, proposed an unspecified extension of the moratorium, long enough for tax simplification and uniformity.

Leavitt’s original proposal called for a three-year halt on federal legislative changes to the states’ ability to require businesses outside their borders to collect sales taxes; urged states to simplify state and local sales-tax systems; and suggested arranging for third-party clearinghouses to work with online merchants to compute and remit taxes to the states. It has been scrapped by Leavitt for the current proposal.

Sokul said direct marketers should be pleased that not one of these proposals suggests overturning the Quill Decision – which prohibits states from collecting sales tax from a direct marketer unless the direct marketer has a physical presence there – as some have in the past.

“No one is proposing that five years from now, Quill should be overturned. That is just totally off the table now, even though there was the possibility that this would happen,” said Sokul.

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