Net Tax Battle Nears End as Competing Plans Spar

DALLAS (03/17/2000) - A group of Internet powerhouses next week will battle against the clock to get approval for a proposal that would simplify sales tax procedures for goods sold over the Internet.

With two votes to go, America Online Inc. (AOL), AT&T Corp., Gateway 2000 Inc., MCI WorldCom Inc., Charles Schwab and Time-Warner Inc. next week will lobby fellow members of the Advisory Commission on Electronic Commerce (ACEC) to support their plan for reducing the complexity of collecting and remitting state taxes gathered by e-commerce ventures.

The commission, which was created in 1998, is due to appear before Congress next month to recommend how to proceed with Internet tax structures. The commission comprises federal, state and local government leaders, Internet business leaders and trade organization representatives.

So far, the Internet companies, which call themselves the Business Caucus, have the leading proposal, with 11 out of 19 commissioner votes. They need 13 votes to gain a two-thirds majority and to have their plan forwarded to Congress.

However, Congress is wary of gridlock and says it will accept the plan as a recommendation with only 10 votes, according to House Speaker Dennis Hastert (Republican, Illinois).

The Business Caucus plan, which is not necessarily pro-tax, says that state and local governments need to simplify their tax laws before they ask companies to collect sales tax from online buyers.

Besides simplification, the plan calls for a five-year extension to the current ban on new and discriminatory taxes for online transactions, a more detailed explanation of what constitutes a company having a physical presence in a state and uniform definitions and exemptions for product categories. It also proposes banning sales tax for physical counterparts to digitized goods such as software.

"We support a plan that urges states to move forward with simplification," says a spokesman for AOL, whose President and Chief Operating Officer Robert Pittman holds a seat on the commission.

But an extreme pro-tax group within the commission, led by Utah Governor Michael Leavitt, says that if states agree to simplify their tax codes, then the states should have the power to make businesses pony up taxes. Currently, they have no national oversight and therefore have difficulty going after companies with operations in multiple states. The group holds four votes.

Yet another faction of the commission, led by Virginia Governor James Gilmore had called for a ban on taxes on the Net, saying they would impede the growth of online businesses. But Gilmore and his group, which have five votes, have agreed to compromise and back the Business Caucus plan. Delna Jones, an Oregon County Commissioner, will also support the plan.

The final votes belong to commissioners appointed by the Clinton administration from the Federal Trade Commission, the Department of the Treasury and the Department of Commerce. While they could provide the swing votes necessary to push forward the Business Caucus plan, the three representatives have not committed their votes, according to a spokesman for Commissioner Joseph Guttentag at the Treasury Department.

Larger e-tailers such as Lands' End have already begun taxing goods based on the precedent set by catalog companies. They only collect and remit taxes for states where they have a physical presence, a concept also known as Nexus.

According to Charlotte LaComb, director of financial and investor relations, Lands' End has Nexus in five states where its main offices, distribution centers, call centers and outlet stores are located. She says, "I'm fine with the status quo."

But those Nexus lines can get blurry. Some Internet-based companies don't have large headquarters, but do have server farms and Web hosting centers scattered about the country. What constitutes a physical presence for them? "The courts or Congress do need to better define Nexus," LaComb says.

Although the Business Caucus plan calls on Congress and the courts to clearly define Nexus, it asks that the locations of a company's ISP, servers or telecommunications provider be exempt from Nexus rules.

The plan also urges state and local governments to develop uniform tax definitions and exemptions, according to commission member Stan Sokel, a representative from the Association for Interactive Media, a trade association for Internet businesses. For instance, Sokel says, in New Jersey if a consumer buys a scarf and uses it for warmth, the purchase is tax-exempt. But if the consumer uses it for decoration, it is taxable. "How's a seller based in North Dakota going to know the difference and how to tax that item?" he says.

Having such tenuous definitions also creates major problems for makers of e-commerce software. Trying to automate the tax collection and remittance process is difficult because the more exemptions there are, the more lines of code and updates are needed, Sokel says.

Another sticking point is use fees. If a consumer buys an item and has it shipped to an address that is not where a company has Nexus, then he doesn't have to pay sales tax to the company. But the consumer is supposed to report it on his tax forms and pay a use tax. States have little to no recourse for collecting these taxes, though.

Sokel says this is less of a problem for business-to-business transactions because purchasing companies are subjected to much more scrutiny by the state.

They have to register with the state where they do business and therefore are subject to audits on whether they are paying use fees for their taxable items.

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