Net tax report in, but issue isn't over

Advisory Commission on Electronic Commerce

Despite the work of a 19- member commission that met for 10 months, heard

from more than 55 experts, received thousands of pieces of mail and formally

presented a 150-page report to Congress last month, the issue of Internet

sales taxes is as unresolved as ever.

"On the first call to battle, the commission came to the decision that

"we stalemated ourselves,'" said Jerry Mechling, director of the Strategic

Computing Program at Harvard University's Kennedy School of Government.

Because the fiercely divided committee couldn't compromise, their report

recommends keeping the status quo: a moratorium on new Internet taxes.

"That's not a bad thing," Mechling said. "But in the long term, they're

going to have to resolve this."

The Advisory Commission on Electronic Commerce, charged by Congress

to prepare the report, presented its work last month. The group first sat

down to discuss e-commerce taxation last June. After meeting three more

times, the sessions culminated with a tense meeting in Dallas last month.

Though the group's work is over, the issue surely is not.

Both sides of the issue stand resolute. On one side are state and local

government officials who not only fear the loss of sales tax revenue, but

believe their local brick-and-mortar stores can't compete against Internet

businesses. On the other are those who believe government should keep their

hands off e-commerce and let it flourish.

Throughout the process, many organizations have taken a stand on the

issue, including the National Governors' Association, the National Conference

of State Legislatures, the Council of State Governments, the U.S. Conference

of Mayors, the National League of Cities, the National Association of Counties

and the National Retail Federation.

At the center of the debate is the Internet Tax Freedom Act of 1998,

which established a three-year ban on special, discriminatory taxes on

e-commerce, although it does not specifically mention state and local sales

taxes. That expires Oct. 21, 2001.

Because two-thirds of the commission couldn't agree on a tax solution

— a stipulation required by Congress — even the commission's report is

the subject of debate.

Nevertheless, the report recommends extending the moratorium on new

and discriminatory Internet taxes until 2006, banning Internet access taxes,

prohibiting sales taxes on sales of digital goods and services and eliminating

the federal telephone tax.

"Government has no right to expand tax burdens on Americans just because

a similar commercial transaction is taxed," Commission Chairman Gov. James

Gilmore (R-Va.) told the Telecommunications, Trade and Consumer Protection

Subcommittee of the House Commerce Committee in April. "Government should

take only what it needs and stop there."

Now that Congress has the report, Mechling said he expects it to act

on the recommendations and draft a bill.

Cameron Whitman, director of policy and federal relations at the National

League of Cities, one of the strongest tax advocates, hopes Congress holds

off on acting on the report.

Whitman said the league would continue to work to create a "simplified,

streamlined sales tax model" for e-commerce. With such a system, and because

the current moratorium only covers new taxes, she said states could simply

extend current sales taxes to the Internet, recouping lost revenues.

"The problem is how to collect them, not that they're on the Internet,"

she said.

Although the lost revenue could become an issue, Mechling said, that

won't happen for at least a decade.

"At the moment, the states aren't going to lose a whole lot," he said,

pegging the loss at less than one percent of total revenues.

In terms of what happens next, Mechling expects Congress to extend the

ban on taxes, and then continue looking into the issue. He sees two possible

avenues for the future:

* Internet business will peak and "cap itself out," just as mail-order

business did years ago. "It wasn't a mortal pain," he said about those revenue

losses.

* Somewhat of a "crisis" will develop as the economy continues to change,

and "we'll have to refigure how we fund local governments," he said.

Mechling said he's leaning toward the second option.

"If allowed to go unaddressed for a long time," he said, "it is likely

to create a problem."