Internet tax report in, but issue isn't over
- By Daniel Keegan
- Apr 13, 2000
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 Wednesday, 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 on Wednesday. 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 bricks 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, ban Internet access taxes, prohibit
sales taxes on sale of digital goods and services and eliminate the federal
"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.) said last week to the Telecommunications, Trade and Consumer
Protection Subcommittee of The House Commerce Committee. "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,"
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 said he expects Congress to extend
the ban on taxes, and then continue to look 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 loses.
* Somewhat of a "crisis" will develop as the economy changes further, and
"we'll have to refigure out 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."