Internet Tax Commission Kicks Off Study

Internet Tax Commission Kicks Off Study<@VM>Advisory Commission on Electronic Commerce

John Sidgmore

By Steve LeSueur, Staff Writer

A federal commission grappling with the controversial issue of Internet tax policy completed its first meeting with a growing consensus on a few key principles that will guide its study, set for completion next April.

Most members of the Advisory Commission on Electronic Commerce, which met June 21-22 in Williamsburg, Va., seemed to agree that if Internet transactions are to be taxed, those taxes should be simple and fair.

"We want whatever tax policy that goes forward ... to be neutral in its application" and simpler, said Michael Armstrong, a member of the panel and chairman and chief executive officer of AT&T Corp., New York. Armstrong said his company fills out 39,000 tax forms every year, or about one every three and a half minutes.

"I don't know whether it's possible in the long-term to tax one form of commerce differently than another," said John Sidgmore, vice chairman of MCI WorldCom and chairman of UUNet, Fairfax, Va., another member of the commission. Sidgmore also said, "The Internet will not collapse if you tax transactions."

The 19-member panel, created last year as part of the Internet Tax Freedom Act, is taking up one of the most contentious and important issues in the new digital age: Should the government levy taxes on Internet transactions, and if so, how should those taxes be collected and administered?

Panel members are drawn from the public and private sectors and represent a variety of contending interests and views.

Many government and industry representatives on the commission expressed the view that access to the Internet should not be taxed. But several also said it might be difficult to justify giving special tax exemptions to Internet transactions that are not given to Main Street businesses.

Virginia Gov. James Gilmore, the commission's chairman, said the panel likely would offer a series of recommendations or options in its April report to Congress, though "it would be wonderful" if the study led to one conclusion.

The commission will hold three more formal meetings: New York in September, San Francisco in December and Dallas in March. "Each of these meetings will be punctuated by months of research, consultation and collaboration between commission members, the public and interested parties," said Gilmore.

Two opposing concerns hover over the panel's deliberations. One is a fear among many state and local governments that the growing Internet economy is eroding tax revenues that sustain basic government services, such as schools, roads and highways and public safety. The other is a fear that overzealous government officials will destroy the Internet with burdensome taxes and regulations.

This issue carries added weight for many Internet proponents, who regard the new medium as the epitome of freedom and the harbinger of a new era in which government bureaucracies and regulation play an increasingly diminished role.

Contrary to a common perception, the Internet Tax Freedom Act does not prohibit the states from levying or collecting new sales and use taxes on Internet transactions; it only places a three-year moratorium on Internet access taxes, that is, the government cannot tax citizens simply for using the Internet.

But while the states can continue to tax Internet transactions, they have a difficult time collecting those taxes, just as they do collecting taxes on other remote transactions, such as telephone and catalog sales.

With consumers turning increasingly to the Internet for purchases, some state and local government officials are predicting that their sales tax revenues will shrink dramatically.

In addition, the officials contend that tax-free Internet transactions put traditional businesses at a distinct disadvantage that could have disastrous effects for both those businesses and the cities where they are located.

Several tax experts who spoke at the Williamsburg meeting, however, said fears about lost tax revenues are exaggerated, a view shared by some commissioners.

"There is no evidence that the growth of the Internet and e-commerce is having any harmful effect on sales tax revenue," said Dean Andal, a commission member who serves as a tax administrator for California's Board of Equalization.

Andal said California's sales tax revenue has grown at the adjusted annual rate of 5.5 percent over the past five years, despite the growth of electronic commerce in that state.

But even if the impact of electronic commerce is not significant today, it soon will be, said Utah Gov. Michael Leavitt, a commission member. "The problem is big enough that we can see it today, but small enough that we can solve it," he said.

Another commissioner, Dallas Mayor Ron Kirk, agreed. "While there may be some evidence that [Internet] transactions may be small in scale to traditional sales, all of us have seen this industry explode and change overnight before our eyes," he said.

At the meeting, there were procedural disagreements among two prominent Republican governors. Leavitt raised several questions about commission rules and procedures and opposed Gilmore's selection of Heather Rosenker, a public affairs professional, as the commission's executive director.

Leavitt said the commissioners should have been more involved in the selection process. He also suggested that a conflict of interest might exist because Rosenker's husband, Mark, is the vice president of public affairs for the Electronic Industries Alliance, an Arlington, Va., lobbying organization that represents about 80 percent of the U.S. electronics industry.

Most significantly, the EIA had been slated to provide the commission with office space and $263,000 of in-kind contributions over the course of the study. Such contributions are necessary because Congress provided no funding for the commission, which must rely on donations from public and private organizations. Virginia, for example, is contributing $150,000 to the commission, which has a proposed budget of $2.1 million.

Government and industry officials attending the meeting were at a loss to explain what underlying interests and concerns, if any, might have been driving the conflict between these two conservative governors who strive to be on the technology forefront.

Some speculated that the battle over Rosenker's selection might reflect differing positions over Internet taxation. While both men said they are approaching the issue with open minds, Gilmore is seen by many as leaning away from Internet taxes, while Leavitt is openly concerned about lost state tax revenue.

But Leavitt contended that his objections were procedural only, and that his sole motive was to ensure the commission succeeds in its task of devising an Internet taxation policy that could garner widespread support.

The debate over Rosenker carried into the last hour of the meeting. It was not resolved until Gilmore warned that the commission could not carry out its task unless he could hire Rosenker and move forward with the commission's business.

The panel approved Rosenker, but in response to concerns expressed by Leavitt and others, Gilmore agreed to move the commission's offices from the EIA to Virginia's George Mason University.

The EIA does not have a position on whether to tax the Internet, nor has it lobbied on the issue, the organization said in a prepared statement following the meeting.

In the end, Leavitt pledged to support Gilmore; and Rosenker, reached after the conference at her office, said she would have no trouble working with the Utah governor throughout the coming year.

James Gilmore

Chairman: Virginia Gov. James Gilmore

Future Meetings:
New YorkSept. 14-15

San Francisco
Dec. 14-15

DallasMarch 20-21, 2000

Report: Deliver to Congress April 2000

Key Task: Examine whether Internet transactions should be taxed, and if so, how those taxes should be collected and administered. Also, examine the impact of such taxes on the Internet and the U.S. economy, the implications for personal privacy and the international ramifications.

Commission Members:

Dean Andal, chairman, California Board of Equalization

Michael Armstrong, chief executive officer, AT&T Corp.

James Gilmore, governor, Virginia

Joseph Guttentag, senior adviser, Office of Tax Policy (delegate for Treasury Department secretary)

Paul Harris, delegate, Virginia House of Delegates

Delna Jones, county commissioner, Washington County, Oregon

Ron Kirk, mayor, Dallas

Michael Leavitt, governor, Utah

Gene LeBrun, president, National Conference of Commissioners on Uniform State Law

Gary Locke, governor, Washington

Grover Norquist, president, Americans for Tax Reform

Robert Novick, general counsel (delegate for the U.S. Trade Representative)

Richard Parsons, president, Time Warner Inc.

Andrew Pincus, general counsel (delegate for the Commerce Department secretary)

Robert Pittman, president and chief operating officer, America Online Inc.

David Pottruck, president and co-CEO,
Charles Schwab Corp.

John Sidgmore, vice chairman, MCI Worldcom, and chairman, UUNet

Stanley Sokul, independent consultant, Association for Interactive Media

Theodore Waitt, president and chief executive officer, Gateway Inc.

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