Internet tax panel entangled in challenges

The panel Congress created to help solve the problem of whether and how to tax Internet commerce held its first meeting last week in Williamsburg, Va. Only the naive and the hopeless optimists among us really expect congressional commissions to accomplish anything. In the beginning of last week's meeting, it certainly looked like this one would be no exception, as administrative discussions about where to house the staff and when to hold the meetings descended quickly into bickering that seemed more about power politics than principle. To the credit of all involved, the ugliness took place in full view of the press, and attempts to retreat to a back room for the infighting were defeated.

In the end, reason—or, depending on your point of view, the power of the chairman—prevailed; Virginia Gov. James Gilmore got the executive director of his choice, and the opposition got the office location of its choice, the neutral site of George Mason University.

The Advisory Commission on Electronic Commerce (ACEC) has a huge task before it and can hardly afford to spend much time in the weeds of administrative squabbles, which both sides acknowledged in working out the compromises. In less than one year, the ACEC is supposed to consider tariffs and taxes, internationally and locally; figure out how the growth in the electronic sale of goods and services in a medium that has no borders affects the revenue base of governing units; and tell Congress whether to extend the three-year moratorium on Internet taxation or replace it with some other system.

That's a tall order under the best of circumstances. In this case, Congress added the challenge of providing no funding for the commission and its work. It makes one wonder why anyone would agree to be a part of such an endeavor. Yet the panel membership is blue-ribbon and finely balanced to represent all points of view.

The reason members will put up with the hassle and workload is that they really believe the issues before them are critical. Dallas Mayor Ron Kirk said the bottom line is if we buy goods on the Internet and do not pay the local sales taxes that support basic city services, we run the risk of having a virtual fire engine respond to a house fire instead of a big red one.

On the other side, Michael Armstrong of AT&T Corp. believes ACEC is an opportunity to simplify the tax situation. AT&T files some 39,000 tax forms each year to various taxing authorities—a situation that began, he said, when Congress decided to fund the Spanish-American War with a tax on telecommunications. Having taken care of that financial obligation, he argues for a tax system that is simple and evenhanded.

That's a lot to ask. Mail-order items purchased outside a buyer's government unit already are treated differently than those bought in a retail store. But the skyrocketing growth of the Internet has convinced legislators and policy-makers alike that they must address this issue while they still can.

Some states, such as Oregon, don't have a sales tax at all and see no issue here. At greatest risk are cities and states that depend on high sales taxes to fund basic services.

However, there is not even agreement that the explosive growth of Internet commerce will affect tax revenue. California employs a "use tax" instead of a sales tax, which takes the question of how you bought something out of the equation. In this case, the tax on an item would be the same whether it were purchased at a corner retail store, by mail order or electronically over the Internet. California's experience has been a growth in taxable sales exceeding the growth of the population. However, California focuses its collection efforts on businesses, not individuals.

Utah Gov. Michael Leavitt believes that tax advantages are not what's powering the growth of the Internet. More choices, faster service and lower prices all play a role.

In the time allocated, the commission will not be able to solve inequities in the tax code, wrestle with the vagaries of international tariffs or solve the high-tech worker shortage, as some suggested would be appropriate. They will be lucky to get even half of what is planned actually completed. But there is a small window available for these businessmen and elected officials to figure out some compromise.

We hope they can rise above the bickering because the decisions they make will ultimately affect everyone who uses the Internet. As the commission members heard in Williamsburg, the rest of the world is watching to see how the United States solves this problem.

-- Armstrong is editor in chief of Federal Computer Week.