Congress, administration could embrace e-commerce tax plan

Posted: Thursday, March 23, 2000

WASHINGTON -- Congress and the Clinton administration could embrace many suggestions made by a federal e-commerce tax commission, but some business-backed recommendations are sure to encounter resistance.

The Federation of Tax Administrators, an organization of state tax officials, estimated that the tax breaks approved by the Advisory Commission on Electronic Commerce meeting in Dallas this week would cost states at least $25 billion annually if enacted.

''The changes would be extremely significant to current law,'' Deputy Treasury Secretary Stuart Eizenstat said.

The 19 commissioners failed to gain the two-thirds majority vote necessary to formally send a full set of recommendations to Congress.

But 11 members did vote to send Capitol Hill the business members' proposal that would extend a moratorium on new Internet taxes until October 2006, eliminate telephone excise taxes and permanently ban taxes on Internet access.

It also would respond to a 1993 Supreme Court ruling that said a business must have a physical presence in a state before that state's sales taxes could be applied. The proposal would make clear that physical presence did not include such things as an Internet service provider or a World Wide Web page.

There is agreement on some of these provisions, but objections were raised to others by the Clinton administration, state and local government representatives and traditional retailers. The offending items would:

n Allow media companies to sell digitized versions of movies, books, newspapers and music -- as well as their physical counterparts sold in stores -- without collecting state sales taxes. Time Warner and America Online, which are merging, have top executives Richard Parsons and Bob Pittman on the commission.

n Permit a company such as computer maker Gateway Inc., represented on the commission by company chairman Ted Waitt, to set up subsidiary ''stores within stores'' and contract for repair services while avoiding sales tax collection.

n Prevent states from collecting income or business activity taxes on services such as information, entertainment and stock brokerage by shifting earned income away from certain states. An architect of the majority plan was David Pottruck, president of Charles Schwab Corp.

n Allow long-distance telephone companies to avoid sales and excise taxes by shifting telecommunications services and sales into different sets of subsidiaries. AT&T Chairman Michael Armstrong and MCI Worldcom Vice Chairman John Sidgmore are members of the panel.

Proponents of the majority plan said these provisions would clarify a jumble of state rules on just what constitutes physical presence that invite frequent court challenges and cause huge compliance costs. The panel's chairman, Gov. Jim Gilmore, R-Va., said the changes would provide ''a roadmap for business as to how they can conduct themselves'' on taxes.

Waitt, the Gateway chairman, denied his motivation was to improve his company's bottom line, as did other business members.

Other parts of the commission's proposal are less controversial. They include a permanent ban on Internet access taxes, an extension until 2006 of a current moratorium on any new or discriminatory Internet taxes and repeal of the 3 percent telephone excise tax enacted in 1898 to finance the Spanish-American War.

On his first full day back from the presidential campaign trail, Sen. John McCain, chairman of the Senate Commerce Committee, introduced a bill that would enact the proposal to extend the Internet tax moratorium until 2006.

''More discussion and more time is necessary to arrive at a fair conclusion'' on Internet taxes, said McCain, R-Ariz.

A co-author of the current Internet tax moratorium, Sen. Ron Wyden, said Congress could pass some parts of the commission's proposal.

''I do think a package like this is doable,'' Wyden, D-Ore., said in an interview. ''I think there would be strong support for barring taxes that specifically target the Internet.''

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