Stateline Story

Internet Tax Panel Starts Work, Hits Snags

WILLIAMSBURG, Va. -- Convening in an auditorium that looked more like a computer sales floor than a committee hearing room, the congressionally appointed Advisory Commission on Electronic Commerce met for the first time this week to begin forging a national policy recommendation on Internet taxation.

But at the end of two days of public hearings in Williamsburg, Virginia on Monday and Tuesday, just about the only matter the nineteen member panel could agree upon was the date and site of their next meeting: September 14 in New York City.

"This commission has struggled to simply be able to meet and organize," said Virginia Governor Jim Gilmore, who was elected chairman of the panel on Monday. "At stake is the future of commerce in America and the ability to freely exchange goods and services over the Internet. Only through effort and openness will we achieve what we need to do in the next ten months."

Congress created the panel last year as part of the Internet Tax Freedom Act, which imposed a three-year moratorium on new Internet sales taxes. The panel was to have begun work in December of last year but was delayed by legal action over the makeup of its membership.

By law, representation must be balanced between industry, state and local governments and the Federal government.

With the threat of legal action removed, the Commission embarked upon the daunting task of satisfying Internet industry figures eager for continued autonomy and state officials who fear a significant loss of sales tax revenue.

"There is a time that every problem is big enough that you can see it, but small enough that you can solve you. This is that time and this is that problem. We have an awesome responsibility," said Utah Governor and commission member Mike Leavitt.

The commission's first meeting drew a large crowd of observers with a hefty financial stake in the panel's recommendations.

Other than last minute fireworks over the appointment of an executive director of the commission, the meeting was marked by the commissioners' agreement on the need for simplicity and neutrality in any taxation recommendations.

"We must work together to protect the interests of both business and our citizens," said Dallas Mayor and commission member Ron Kirk. "We understand that some people want to keep the Internet free, but we also have an obligation to provide schools, roads, police and other government services.

"We need a tax structure that allows cities and states to do that," Kirk said.

Members of the panel could agree on little, including the core issue of whether the current tax-free status of Internet sales has a significant impact on state revenue collections.

"We need to start off by agreeing not to put the boundaries of government on a new and critical industry," said commission member Grover Norquist, president of Americans for Tax Reform. "We also need to undo the damage that has been done by one-hundred years of wrongheaded taxes."

While estimates vary widely, it is undeniable that sales of goods and services over the Internet are an increasingly important part of commerce in the United States.

Forty-five states (all but Alaska, Delaware, Montana, Oregon and Vermont) levy some form of sales tax, but none had a system capable of taxing Internet commerce before the moratorium went into effect.

In addition, 6,600 localities impose their own forms of sales taxes, according to University of Tennessee economist William Fox. Nationwide, sales taxes account for 24.5% of all state tax revenue, behind only property taxes.

Estimates of lost revenue range anywhere from $20 billion per year to $5 billion a year, depending on which assumptions economic forecasters use.

But according to figures released by the Department of Commerce, 80% percent of all internet transactions occur between two businesses and are therefore not subject to sales taxes. In addition, upwards of 60% of all online purchases involve travel tickets and other services that are also exempt from sales taxes.

In a presentation to the committee, Peter Merrill of Pricewaterhouse Coopers said that any state revenue losses would amount to only one-quarter of 1% of all state tax revenue.

"There is no support for the chicken little theory that the tax system is hemorrhaging as a result of electronic commerce," Merrill said.

Commission members, especially from the business community, provided numbers that put into context the amazing growth in online activity.

"Internet companies have create over $300 billion in market share valuations over the past two years and every three and a half months, the demand for new Internet bandwith doubles. By the year 2004, 99% of all telecomm bandwith will be used by the Internet," said John Sidgmore, Chairman of UUNET and Advisory Commission member.

David Pottruck, President and co-CEO of Charles Schwab, said that his company now handles almost $2 billion every day in Internet trades. Pottruck sees the commission's job as balancing competing interests.

"The Internet is a reinventing technology that improves services and lowers costs. But in regards to taxation, it should not be favored over existing forms of commerce," he said.