I-Tax Report Presented to Congress

The Advisory Commission on Electronic Commerce ceremoniously presented its 110-page report to Congress yesterday causing some to applaud and some to lambaste the report that seeks to curtail government's ability to tax the Internet.

The commission's chairman, Gov. James. S. Gilmore III, R-VA, and other commissioners presented the report to Congressional leaders including House Speaker Dennis Hastert; Senate Majority Leader Trent Lott, R-MS; and House Majority Leader Dick Armey, R-TX.

“Members of this commission have moved swiftly from a healthy e-tax debate to a responsible report that reflects the priorities of American taxpayers and consumers. I am proud of the quality of ideas commission members have produced and look forward to the Congressional action on this matter,” Gilmore said.

The report has been endorsed by the Direct Marketing Association, along with many direct marketers.

Appointed by Congress in October 1998 as part of the Internet Tax Freedom Act, the 19-member commission has been tasked with studying the impact of federal, state, local and international taxation and tariffs on transactions using the Internet and Internet access. The commission's recommendations were due to Congress no later than April 21. Currently, there is a ban on new Internet taxes until October 2001.

Also at the hearing, Speaker Hastert said legislation will be introduced in the House next month to extend the current moratorium on new and discriminatory taxes on the Internet to 2006; ban Internet access taxes permanently and eliminate the 3 percent federal excise tax on telecommunications.

“Congress is already planning to act on the recommendations that Gov. Gilmore and his commissioners agreed upon,” said Speaker Hastert. “The Internet can not continue to drive our nation's economic growth if it gets bogged down in thousands of different bureaucratic jurisdictions that want to regulate and tax it. Taxes are an impediment to economic growth. Instead of slowing growth, we should be encouraging it. We must provide all of our citizens with the opportunity to join the information age.”

The Commission's report has received plaudits from Republicans and Democrats. Senators Judd Gregg, R-NH, and Herb Kohl, D-WI, for example, introduced legislation this week based on the report that would prevent states from forcing out-of-state businesses that have no physical connection to the state to collect sales taxes on their behalf.

Not everyone agrees with the ACEC’s proposal, however.

Gov. Michael Leavitt, R-UT, a dissenting member of the ACEC presented a letter at the hearing signed by 36 of the nation's 50 governors that denounced the commission as a forum for special interests seeking tax breaks while threatening the system in which states set their own tax policies to pay for police, firefighters and schools.

Leavitt said that the most important reason he and the group oppose the proposal is that it would substantially interfere with state sovereignty.

“For well over 200 years, the federal government has respected state sovereignty and has been extremely careful not to interfere with the states' ability to independently raise revenues. This proposal would dramatically undercut this precedent,” the governors wrote.

The letter also says that the Internet tax commission ignored its mandate by pursuing special interest tax breaks sought by companies with seats on the commission.

“Instead of addressing the requirements laid out in the law to recommend a new state and local sales tax system to provide for fairness and balance,” the governors wrote, “the proposal chose to use this opportunity to seek a host of new and expensive special tax breaks. We urge you to reject the report.”

The majority report was approved by 10 of the 19 Commissioners. It asks Congress to:

Extend the current moratorium on new and discriminatory taxes targeted at the Internet for an additional five years, to 2006;

Ban Internet access taxes permanently;

define nexus, or connection, standards for a company's physical presence and

provide specific examples for out-of-state taxation;

Ban sales taxes on the sale of digital goods and services;

Eliminate the 3 percent federal excise tax on telecommunications;

Establish standards for simplification of state tax systems so that eventually one rate would apply in every state;

Establish a new advisory commission to oversee states' tax simplification efforts;

Protect consumer privacy on the Internet.

In defining nexus, the proposal asks Congress to adopt legislation expanding the U.S. Supreme Court's 1992 Quill decision, which prohibits states from taxing mail-order sales unless the seller has a physical presence in the state. Currently, both catalog and Internet sellers collect sales taxes from customers on behalf of a state if their companies have a physical presence there.

The ACEC’s report, for example, indicates that physical presence doesn't include such things as an Internet service provider or an Internet home page and that a seller doesn't have nexus if it has a contractual obligation with another party in a state that it uses simply for product returns or to repair goods.

The report also recommends to Congress the need to bridge the “Digital Divide” to permit all Americans to participate in the Internet economy and addresses the issue of privacy concerns, noting that any tax administering system for e-commerce should be developed in a manner that minimizes disclosure of consumers' personal information and should contain sufficient security to protect that information. The Commission recommended that the appropriate committees of Congress should explore privacy issues associated with the collection and administration of taxes on e-commerce.

The dissenting letter was signed by 19 Republicans, 15 Democrats and two independents, Jesse Ventura of Minnesota and Angus King of Maine.

Among the governors who did not sign the letter were George W. Bush of Texas; Jeb Bush of Florida; George E. Pataki, New York; and James S. Gilmore III, Virginia — all Republicans, and Gray Davis of California, a Democrat.

The Capitol Hill Republicans are also under attack from retailers ranging from organizations of mom-and-pop merchants to the nation’s largest retailer, Wal-Mart. Only a handful of large retailers favor the proposal to keep the Internet exempt from sales taxes.

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