Consensus Eludes Internet Tax Meeting

DALLAS (03/21/2000) - A body formed by U.S. Congress to come up with a solution to the Internet tax debate has failed to find one. But the group's two-day meeting ended with a twist -- a last-minute, but ultimately failed gambit by its pro-tax members to win the day.

In the end, after many hours of private meetings among the commissioners, the Advisory Commission on Electronic Commerce failed to get the required two-thirds -- or 13 of 19 votes -- for any of its key proposals.

But the commission did get majority votes for some of its most important proposals, and ended the meeting very close to an agreement that had two-thirds backing.

"I don't believe what separates us are special interests," said AT&T Corp.

Chairman Michael Armstrong. "I think what we have really run into is the issue of time."

The members opposed discriminatory taxes on the Internet and would likely back an extension of the federal moratorium, due to expire next year, on Internet-specific taxes. There was strong support for elimination of a telecommunication excise tax and for a ban on taxes for Internet access, along with support for overall simplification of sales tax rules.

What entangled the commission was the problem of nexus -- the physical presence rules that determine whether a business has an obligation to collect sales taxes. Those rules vary from state to state, and the businesses on the commission were pushing strongly for national, uniform standards. Any changes in those rules could have a big impact on companies and governments, and disagreement over them was sharp.

The commission ended the meeting with one crack in the door: They changed their rules to allow a conference call vote if an agreement can be reached prior to submitting a final report to Congress on April 21.

After failing to resolve the nexus sticking points, pro-tax proponent Utah Governor Michael Leavitt made a last-minute effort to get the commission to send a report to Congress that at least philosophically supported a "level playing field" for both dot-com retailers and brick-and-mortar companies.

Leavitt introduced a document, which he said was chiefly written by fellow commissioner David Pottruck, the president and CEO of Charles Schwab & Co. in San Francisco, that warned of problems if the current tax system will be viewed as "inherently unfair" and "bring contempt."

But Pottruck had left the meeting.

While the debate continued, Pottruck reached Armstrong by cell phone. Pottruck "asked me to express on his behalf that he did not agree that this would be presented," Armstrong said.

The proposal died.

Commission members expressed a combination of disappointment and satisfaction with the work. There was criticism directed at the three federal officials on the commission who had abstained on just about every vote, citing the inability of the commission to reach a true consensus.

"I would hope at the end of the day we would get everyone to be part of the solution," said Richard Parsons, president of Time Warner Inc., and not "just throwing up their hands and taking a powder on every issue."

But Andrew Pincus, the general counsel at the U.S. Department of Commerce, defended their efforts to reach a consensus, and said they had worked many hours behind the scenes with all parties.

The leading proposal, which received 11 votes, had been developed by the so-called business caucus, the six business representatives on the commission that was also made up of state and federal officials and special interest group representatives. Those members represented the following companies: America Online Inc., Time Warner Inc. in New York, MCI WorldCom Inc., AT&T Corp., Charles Schwab & Co. in San Francisco and Gateway Inc. in North Sioux City, S.D.

The business caucus plan sought to make it easier for a business to offer customer services in all 50 states without increasing its tax liability by recommending some national physical presence standards. For instance, the plan would have allowed an out-of-state seller to offer warranty services and product returns without fear that those particular business activities would be considered a physical presence under law.

But some of the state officials viewed the nexus business rules as a "rollback" of existing local laws and a loss of local tax revenue, said G. Kent Johnson, a tax expert at KPMG Peat Marwick LLP. "They view this as giving up on nexus creating activities that are hard fought and hard won, and we don't want to give up on those," he said.

The issue is far from over.

The state governors that support sales tax collection by all sellers on the Internet plan to ask the National Conference of Commissioners on Uniform State Laws, a body that drafts commercial codes and then sends them to all 50 states for adoption, to create a simplified set of rules for e-commerce.

In a conference call, U.S. Treasury Deputy Secretary Stuart E. Eizenstat said the administration had attempted to serve as an "honest broker" on the nexus issues but said the businesses sought "enormous and significant" changes in existing taxing laws.

But enough effort was made on a compromise to pursue negotiations, he said. "We will do all we can to try to bridge the remaining differences," said Eizenstat.

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