Compromise eludes Internet tax group

DALLAS - The commission appointed by U.S. Congress to solve the Internet

tax problem rejected the key compromise proposal at its final meeting

Monday, and appeared destined to leave Congress without any clear policy

recommendation.

The Clinton Administration members, joined by the pro-sales tax collection

members, abstained from voting on key proposals — depriving the 19-member

Advisory Commission on Electronic Commerce of the 13-vote "super majority"

needed to send a recommendation to Congress.

Commission members spent most of the first day of their two-day meeting

debating a plan by the six business representatives on the commission to

call for massive tax simplification among the states. The plan would also

extend the Internet Tax Freedom Act moratorium on new taxes for five years,

eliminate excise taxes on telecommunications and exempt digital goods and

their physical counterparts, such as music and books, from taxes.

The plan failed, with 11 yes votes, one no and seven abstentions.

"We tried to create something that is a middle ground," said David

Pottruck, president and chief executive officer of Charles Schwab & Co. in

San Francisco. "This is definitely a no-new-taxes-on-the-Internet

proposal. But it's not a no-sales-taxes-ever-on-the-Internet proposal."

The business proposal calls for a level playing field on sales taxes — an

equal obligation between so-called brick and mortar sellers and Internet

retailers. However, this "compromise proposal" didn't detail how this would

be accomplished. Instead, it says that once the states simplify taxes, a

legal "pathway" may be created to allow application of the taxes.

"I don't think that any form of distribution (of goods and services)

should have one advantage over another form of distribution," said Michael

Armstrong, chairman of AT&T Corp.

But the pro-tax members, who had tried to get the business group to

support a flat tax for remote sellers, opposed the business-backed plan for

out-of-state sales.

"I don't see how anyone in good conscience can forward this to Congress in

the name of fairness," said Dallas Mayor Ron Kirk, who called the tax

breaks in this business plan "a huge money grab."

The failure to reach agreement means that businesses may begin to employ

different strategies to protect themselves from taxes.

Businesses could follow the example of Bentonville, Arkansas-based

Wal-Mart Stores Inc., which in January turned its online business,

Walmart.com, into a separate subsidiary.

Only Wal-Mart's online customers who live in California, Utah or Arkansas

will pay a sales tax, unlike customers at its physical stores, who pay tax

in every state that collects them.

"We're going to compete on the Internet," said David Bullington, a

Wal-Mart vice president. But if other companies follow this example, "there

is no doubt going to be a tremendous erosion of the tax base," he said.

Wal-Mart now collects more than US$7 billion annually in sales taxes for

states.

— Patrick Thibodeau is a reporter for

Computerworld