Treasury Stirs Cyberspace Tax Issue

The Treasury Department looks for solutions to the technical and legal difficulties hindering tax collection in cyberspace

The Treasury Department will release an "issues paper" on cyberspace taxes late this summer, likely precipitating a controversial debate on how the government can tax electronic commerce.

The paper will "raise what we see as the most important issues on taxation on electronic commerce, the Internet [and] private networks," said Bruce Cohen, a senior attorney at the Treasury Department.

The paper is being drafted and redrafted by senior officials and lawyers in the department. The department is headed by Secretary Robert Rubin, and includes the Internal Revenue Service, the Comptroller of the Currency and the Financial Management Service, which oversees government regulation of the nation's financial system.

The study will be released as the infotech industry prepares for a wide-ranging debate on the nation's tax system during 1997, said Bill Archey, Washington-based director of the American Electronics Association. The debate will include such ideas as flat taxes, and will help the infotech industry lobby for changes to taxes that hurt its activities, he said.

The Treasury Department's issues paper is driven by the growing role of electronic commerce and intellectual property in the economy. Although transactions conducted over the Internet and other communications links are relatively small, forecasters say they will rapidly grow to tens of billions of dollars per year by 2000.

"It is far better to deal with it now than deal with a number of controversies in the court," said Cohen.

The issues paper will outline a series of questions, allowing a public debate before government officials complete new tax regulations, new laws and international treaties, Cohen said.

The Paris-based Organization for Economic Cooperation and Development has also been discussing tax collection in cyberspace, he said.

At a Washington conference hosted by the Washington-based Information Technology Association of America, Cohen cheered industry officials when he said the issue paper would proceed incrementally and would try to treat the cyberspace economy as it treats the existing economy.

"It is important that the tax system be neutral between electronic commerce and the more conventional methods" of commerce, he said

Industry officials said they hoped the tax system would not penalize electronic commerce. Also, executives said they hoped any collection system would be easy to comply with and not include multiple and overlapping taxes imposed by various jurisdictions, such as countries, states and cities.

However, conference participants warned that the development of a tax system for cyberspace will be very complex. "This is going to be much, much more difficult" than conventional tax policy debates, warned Alan Wilensky, a partner with the Washington-based firm of Bryan Cave.

For example, a cyberspace company may disappear before any tax collector might learn of its existence, thus avoiding any taxes, said Paul Mines, general counsel for the Washington-based Multistate Tax Commission, which helps coordinate tax policy among the 50 states.

Current plans are for the issues paper to first identify a series of technical issues in the tax code that must be resolved, such as income raised via satellite broadcasting, said Cohen.

The paper will also try to pin down complex questions relating to electronic commerce, such as whether a World Wide Web site can be treated as a place of business for tax purposes, and whether its physical location should be determined by the location of the site's server, he said.

In addition, the issue paper will address how tax evasion can be avoided, said Cohen. For example, how can tax evasion be avoided when difficult-to-crack data encryption is ubiquitous?

"There has to be a balance between the need of the systems [for the free and private flow of information] and the tax system," he said.

Also, government officials will try to decide how the tax collection system can be made easy enough for even small companies to accept. For example, the collection system should be able to collect tax on the royalty from an image downloaded by a computer user at home, Cohen said.

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