E-Commerce Panel Goes Home Empty-Handed

DALLAS (03/22/2000) - Not even 20 hours of back-room negotiations, artful parliamentary maneuvering and a firm deadline Tuesday could help members of a hopelessly divided congressional tax panel broker an agreement to clarify rules for collecting sales taxes on purchases via the Internet.

During the Advisory Commission on Electronic Commerce's final face-to-face meeting on the final day Tuesday, the only measure approved by the two-thirds super-majority vote required by Congress is a recommendation to safeguard consumer privacy when addressing the tax issue.

Members of the 19-member panel, created by the Internet Tax Freedom Act of 1998, ended the divisive meeting by vowing to continue conversations before issuing a report to Capitol Hill by the statutory deadline of April 21. "I really believe that because we are so close, there is still some opportunity," says panel member John Sidgmore, vice chairman of MCI WorldCom.

On Monday, the panel voted 11-1 to support a plan that includes a five-year moratorium on new taxes on the Internet and a plethora of special-interest tax cuts on access charges, digitized goods and telecommunications. That plan is favored by businesses and by antitax factions. Seven panel members abstained to protest what they called a lack of attempts to reach a broader consensus. That protest led to late-night and early morning stabs at brokering a larger agreement to meet the two-thirds majority vote.

But the discussions broke down Tuesday because representatives of state and local municipalities were reluctant to agree to the proposal's call for federal law to clearly define what constitutes a company having physical presence in a sales-tax jurisdiction. The U.S. Supreme Court has ruled that a company must have physical presence, or nexus, before it can be forced to collect sales taxes for a taxing authority. The plan also included provisions to exempt companies from sales-tax collection if they only use an Internet service, server or telecommunications provider in a state or if they merely offer warranty services or have relationships with third-party affiliates in that state.

But state and local representatives on the panel thought the measure went too far and could cut off their ability to collect other forms of revenues, such as income and franchise taxes, from companies. "The issue that still divides us is the issue of nexus," says Delna Jones, a commissioner from Washington County, Ore., which doesn't have a sales tax but depends on income tax revenues from businesses to provide essential services. "Some of the business people have not understood why it was such an important issue. We have nothing in this issue other than the issue of an income tax we are dependent on. If the rules are changed, we're in trouble."

Dallas Mayor Ron Kirk went even further, criticizing the business proposal for being self-serving, providing tax breaks sought by each of the companies on the panel. He told reporters: "I just don't believe the commission's work will have credibility with Congress if we go to them and say, 'Look, we did all these things for the business community,' but we can't say we helped Main Street or retailers or state and local governments."

But the business leaders disputed Kirk's contention. They argued that the tax breaks are merely passed on to consumers. They also said they didn't believe that the sides were so far apart that a better deal couldn't be brokered by the April 21 deadline. "I don't believe that what separates us are special interests," says AT&T Chairman Michael Armstrong. "What we've really run into is the issue of time. ... At the end of the day, we just can't get over the goal line."

Other panelists said they were bewildered that the 10-month process has failed to produce the strong recommendation that Congress was seeking. Some blamed the three federal representatives on the panel, who chose to abstain in protest from almost all votes during the two-day meeting rather than publicly agreeing or disagreeing with the measures. "If ever there was an issue one would assume our leaders might attempt to help lead on, it's this is one," says Time Warner President Richard Parsons. "I'm bewildered by the number of abstentions we have had on virtually everything, particularly from our federal representatives."

One of the federal representatives, Andrew Pincus, counsel to the U.S. Commerce Department, said after the meeting that President Clinton wanted the federal representatives to act as "honest brokers" between the various factions on the panel. "We were interested in developing a real consensus," Pincus said, as opposed to "just putting our votes on a scoreboard."