*Net Tax Commission Still in Deadlock; Compromise Doesn’t Get Enough Votes

DALLAS–Today is deadline day for the Advisory Commission on Electronic Commerce, which must decide on how the Internet should be taxed in the new millennium. The 19-member group, which concludes its meeting here today, spent much of last night wrangling over negotiations.

The commission — which consists of representatives from industry and consumer groups and representatives from state, local, and federal government — was appointed by Congress in 1988 as part of the Internet Freedom Act with the task of studying the impact of federal, state, local and international taxation and tariffs using the Internet and Internet access. The commission's recommendations must be presented to Congress by April 21. Currently, there is a three-year moratorium on new, special and discriminatory taxes on the Internet.

Since the commission was formed, it has been bitterly and philosophically divided between two camps: those opposed to Internet taxes and those who favor them. Commissioners still are attempting to negotiate a compromise proposal submitted by the business members — including C. Michael Armstrong, chairman/CEO, AT&T; Richard Parsons, president, Time Warner Inc.; Robert Pittman, president/CEO, America Online Inc.; David Pottruck, president/co-CEO, Charles Schwab Corp.; John Sidgmore, vice chairman, MCI WorldCom and chairman, UUNET; and Ted Waitt, chairman, Gateway Inc.

Basically, the proposal recommends that Congress enact legislation to extend the current moratorium for five years and prohibit taxation of digitized goods and products and their non-digitized counterparts. It also makes permanent the current moratorium on Internet access taxes, stresses a uniform tax structure in the future and, more immediately, establishes detailed clarifications determining whether a seller has sufficient nexus with a particular state that would cause that state to impose collection obligations. For example, it says Congress should enact legislation saying a seller does not have nexus if it has a contractual obligation with another party in the state where it just has its products returned, or, it just because its digital data on a server is located in a particular state.

Under current law, both catalog and Internet sellers collect sales taxes from consumer and business customers on behalf of a state if their companies have a physical presence there. But, physical presence is very broadly defined by states.

“The business caucus proposal would make much stricter rules surrounding what constitutes nexus,” said Rich Prem, a multistate tax partner with Deloitte & Touche's High Technology Group, San Francisco.

For the proposal to pass, a two-thirds majority — or 13 of the 19 votes — must approve it. As of last night, however, only 11 members of the commission — including those against new Internet taxes — voted for the compromise. However, under the Internet Tax Freedom Act, the commission can send a report to Congress that a majority — but not the super majority — had voted in favor of the compromise.

The final decision on how the Internet will be taxed in the future is not up to the commission, said George Isaacson, legal counsel for the Direct Marketing Association. “Congress really makes the final decision on this issue anyway.”

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