Net Tax Debate Still Unresolved

DALLAS (03/27/2000) - The failure of a commission appointed by the U.S.

Congress to reach an agreement on Internet taxation last week didn't upset Joe Dittmar's world of tax applications.

Dittmar is the e-commerce applications manager at clothing retailer Abercrombie & Fitch Co. in Reynoldsburg, Ohio, and stores like his were at the center of the debate over Internet taxation last week. Unlike pure dot-com companies, Abercrombie's 250 stores give the company a national physical presence, meaning the retailer must charge its online customers sales taxes in most states.

Dittmar's job includes managing the tax software.

"If they removed our need to collect taxes, that would just save us money because we would stop renewing our [tax software] maintenance and licensing agreements. But it wouldn't be like we would have to lay someone off," Dittmar said. Collecting taxes isn't very complex, he added.

The real problem concerns competition. Big retailers such as Wal-Mart Stores Inc. in Bentonville, Arkansas, urged the Advisory Commission on Electronic Commerce to adopt a proposal that "leveled the playing field" by imposing an equal obligation on all Internet sellers to collect taxes.

The commission came close to reaching agreements but fell two votes short of the required two-thirds - or 13 of 19 votes - for any of its proposals to become recommendations to Congress.

"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."

Time is short for the commission, which began meeting in June of last year. A final report to Congress is due next month.

The Debate Continues

More companies could begin to follow Wal-Mart's example and turn their online businesses into separate subsidiaries. By doing so, Wal-Mart is able to avoid collecting sales taxes from its online customers, except those who live in California, Utah or Arkansas.

"We're going to compete on the Internet," said David Bullington, a Wal-Mart vice president.

Retailer J.C. Penney Co. is considering a similar move.

"Anybody in our business has to think about that," said Wayne Zakrzewski, a tax manager at the Plano, Texas-based retailer.

But the tax implications are muddy. Wal-Mart, for instance, lets online customers return merchandise to local stores, a practice that many experts say increases a company's tax obligation.

The six business members on the commission sought uniform nexus or physical presence rules to settle these issues. But disagreement among the businesses and commissioners from state governments over nexus crippled the talks.

Key to any Internet tax collection plan is the simplification of tax laws. A number of states intend to push for that while also investigating technological solutions. One product, a transaction server developed by Taxware International Inc. in Salem, Massachusetts, uses Internet protocols to manage taxes and potentially link to state tax systems.

Jennifer von Drechsel, an automated-compliance tax expert at PricewaterhouseCoopers in New York, said she believes companies will move to tax transaction servers to simplify processes. But she said she also sees greater interaction between corporate tax and information technology departments, as enterprise resource planning systems automate tax functions.

A key problem is getting tax and IT professionals to understand one another.

"They are almost talking different languages," von Drechsel said.

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