Panel Delays Internet Tax Decision

A commission created to devise tax rules for the Internet avoided making any decision at its meeting in San Francisco this week, and panel members and insiders don’t expect it to reach a consensus before the April 21 deadline.

While the Advisory Commission on Electronic Commerce may make the deadline on less controversial positions – such as banning taxes on Internet access, opposing international tariffs on e-commerce and eliminating the existing 3 percent federal tax on telephone service – the thorny issue of how e-commerce companies should collect and remit sales taxes to states may prove more elusive. The group voted 10-5 to delay taking a position until its final meeting in March in Dallas, even though a majority of the members voiced support for both.

If the commission doesn’t meet its April deadline, Congress may have to take up the issue or ask the group to continue its work. Some members have said they wish to stall the issue for a few years to allow the Internet to grow and determine whether states actually would lose revenue. The 19-member panel, created as part of last year’s Internet Tax Freedom Act, is debating whether electronic purchases should be subject to the same sales taxes as goods bought on Main Street. Congress also imposed a three-year moratorium on creating new or discriminatory taxes on e-commerce.

The commission is split between state and local government officials, who fear they will lose tax revenue needed for schools and other municipal services, and Republican congressional leaders, anti-tax activists, some business executives, and a few local officials who think a lack of Net taxes has accelerated e-commerce’s growth.

In San Francisco, the commission heard presentations of proposals submitted in response to an Oct. 15 invitation to the public. Of the 37 received, 13 representatives were invited to formally present their proposals.

Gov. William Janklow, R-SD, and Illinois state Sen. Steven Rauchenberger presented a plan on behalf of the National Governors’ Association and other state and local government organizations. The proposal, dubbed the “Zero Burden Proposal,” was originally presented last month by Gov. Michael O. Leavitt, R-UT, who is chairman of the NGA and a commission member.

The plan calls for a three-year standstill on any federal legislative changes to the states’ ability to require businesses outside their borders to collect sales tax. It also urged states to simplify the existing state and local sales tax systems and suggested arranging for third-party clearinghouses to work with online merchants to compute the appropriate tax and remit it to the states. The clearinghouses would be compensated by a fraction of the tax revenue. The entire plan would be voluntary, but participating businesses would be granted immunity from certain tax audits, Janklow said.

“We take the burden of taxes off the remote seller and put it in the hands of trusted third parties,” Rauchenberger said.

Frank Julian, operating vice president and tax counsel at Federated Department Stores and chairman of the Direct Marketing Association’s U.S. Tax Committee, testified at the meeting and said the proposal raises many questions, even though “the concept of being entirely removed from the tax collection process is certainly appealing.”

Julian said 13 issues should be considered. For example, determining the taxability of certain categories of products can be complicated for a multistate business, and different industries use different methods to identify which products are subject to tax. The plan contains serious privacy issues as well, he said. As vendors develop new products, they will be required to provide information to trusted third parties before advertising them for sale so the taxability can be input into the system. Because of the competitive nature of business, he said, some companies will have legitimate concerns about prematurely disclosing their product mix to other parties.

Insiders said the NGA wants to implement its proposal at the state level no matter what the commission recommends. The group hopes that five to 10 states will implement the plan within the next 18 months and that other states will follow.

The tax debate is heating up. Republican presidential candidates have brought up the issue in recent debates, and most have opposed Internet sales taxes. In addition, the e-Fairness Coalition, a group of major national and local retailers of traditional and online stores, released survey results this week that show that most Americans think existing tax policy should be equally applied to brick-and-mortar and online retailers.

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