Internet Tax Group Rejects Compromise

DALLAS (03/20/2000) - The commission appointed by U.S. Congress to solve the Internet tax problem hit the rocks at its final meeting today, rejecting the key compromise proposal. The commission appeared destined to leave Congress without any clear policy recommendation.

The Clinton Administration members, joined by the pro-sales tax collection members, abstained from voting on key proposals -- depriving the 19-member committee of the 13-vote "super majority" needed to send a recommendation to Congress.

That action left the Advisory Commission on Electronic Commerce embroiled in a debate over whether it could send a report to Congress that included simple majority votes.

The commission members spent most of the first day of their two-day meeting debating what emerged as the key proposal: a plan by the six business representatives on the commission to call for massive tax simplification among the states, extend the Internet Tax Freedom Act moratorium on new taxes for five years, eliminate excise taxes on telecommunications and exempt digital goods and their physical counterparts, such as music and books, from taxes.

The plan failed, with 11 yes votes, one no vote and seven abstentions.

"We tried to create something that is a middle ground," said David Pottruck, president and chief executive officer of Charles Schwab & Co. in San Francisco.

"This is definitely a no-new-taxes-on-the-Internet proposal," said Pottruck.

"But it's not a no-sales-taxes-ever-on-the-Internet proposal."

The business proposal calls for a level playing field on sales taxes -- an equal obligation between so-called brick and mortar sellers and Internet retailers. However, this "compromise proposal" didn't detail how this would be accomplished. Instead, it says that once the states simplify taxes, a legal "pathway" may be created to allow application of the taxes.

"I don't think that any form of distribution (of goods and services) should have one advantage over another form of distribution," said Michael Armstrong, chairman of AT&T Corp.

The business caucus also includes America Online Inc., Time Warner Inc. in New York, MCI WorldCom Inc. and Gateway 2000 Inc. in North Sioux City, South Dakota.

But the pro-tax members, who had tried to get the business group to support a flat tax for remote sellers, opposed the business-backed plan for out-of-state sales.

"I don't see how anyone in good conscience can forward this to Congress in the name of fairness," said Dallas Mayor Ron Kirk, who called the tax breaks in this business plan "a huge money grab."

The failure to reach agreement means that businesses may begin to employ different strategies to protect themselves from taxes.

Businesses could follow the example of Bentonville, Arkansas-based Wal-Mart Stores Inc., which in January turned its online business, Walmart.com, into a separate subsidiary.

Only Wal-Mart's online customers who live in California, Utah or Arkansas will pay a sales tax, unlike customers at its physical stores, who pay tax in every state that collects them.

"We're going to compete on the Internet," said David Bullington, a Wal-Mart vice president. But if other companies follow this example, "there is no doubt going to be a tremendous erosion of the tax base," he said. Wal-Mart now collects more than US$7 billion annually in sales taxes for states.

Retailer J. C Penny Co. in Plano, Texas, is also considering creating a separate subsidiary out of its online business. "Anybody in our business has to think about that," said Wayne Zakrzewski, a tax manager at J. C. Penny.

But whether retailers can integrate an online business with a physical one poses potential legal issues.

Wal-Mart, for instance, lets online customers return merchandise to local stores. But Zakrzewski says most tax experts believe that if you try to return something, you have an obligation to collect sales taxes.

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