Political Divisions Widen On E-Commerce Taxation

WASHINGTON -- With less than a week remaining before a self-imposed November 15 proposal deadline, the congressionally-appointed Advisory Commission on Electronic Commerce Wednesday received two major proposals from conservative groups to make electronic commerce and Internet access completely tax-free. The two anti-tax proposals come on the heels of a recommendation adopted by state and local government groups last week to subject electronic commerce to a streamlined uniform sales tax system on electronic commerce.

The advisory commission's mandate is to come up with an Internet tax policy recommendation for Congress by April 20. Currently, there is a three-year moratorium on new Internet taxes or access fees that lasts through October 2001.

Virginia Gov. Jim Gilmore, the commission's Republican chairman, unveiled one of the latest proposals. It calls for the elimination of all sales taxes on Internet purchases; the elimination of federal excise taxes on local and long-distance telephone service; the distribution of $1.7 billion in federal tax revenues to compensate states for any lost sales tax revenue; and a closing of the so-called Digital Divide by permitting states to spend welfare money on computers and Internet access for the poor.

"The Internet is the driving force of the American economy. America must enhance the Internet and the new economy by adopting pro-growth tax policies and changing the way government does business," Gilmore said.

Another group that includes House Budget Committee Chairman John Kasich (R-Ohio), two conservative ACEC commissioners (Grover Norquist and Stanley Sokul) and a coalition of conservative policy groups submitted a second, slightly less sweeping plan to keep the Internet tax-free.

The Freedom Coalition proposal includes a permanent ban on sales and use taxes that specifically apply to online commerce, eliminating the 3 percent federal excise tax on telephone service and prohibiting attempts to tax or regulate Internet access.

Both plans oppose international tariffs and taxes on electronic transactions, a position that the Clinton administration has already adopted.

"When it comes to the growth of business online, any talk about taxes is entirely out of line. The explosive growth in e-commerce represents nothing short of a second Industrial Revolution. The biggest threat to this growth is the possibility of government treating the Internet like a cash cow," Kasich told a news conference.

The Gilmore and Kasich proposals drew immediate criticism from other members of the Internet tax panel, including Utah Gov. Mike Leavitt, a moderate Republican who chairs the National Governors' Association (NGA).

"The interest of the states is to ensure that every American is treated equally and that taxation is based on if they buy, not where they buy and where they sell," Utah Governor and commission member Mike Leavitt said.

Sales taxes are a critically important source of revenue for most of the 50 states and many cities. According to a report funded by Cisco Systems, the computer networking giant, revenues among U.S. companies selling products over the Internet have more than doubled to an estimated $170 billion since last year and exponential growth of the cyber-economy is projected far into the future.

"The Kasich proposal discriminates against Main Street businesses, violates the Constitution, means fewer teachers, less law enforcement and hurts low-income taxpayers," read a National Governors' Association press release.

The NGA, along with the National Conference of State Legislators, the Council of State Governments and the other "Big 7" organizations representing state and local government have adopted--but not formally submitted--an Internet tax plan of their own.

Under their proposal, states would use new software technology to collect sales and use taxes from mail-order, interstate and Internet sellers. A state clearinghouse, or "trusted third party," would administer the voluntary system.

The clearinghouse would use available software to provide tax information to buyers and sellers online, arrange with credit card payment processors to have taxes remitted to the clearinghouse and then transmit the taxes to the appropriate state.

The clearinghouse would be selected through a competitive bidding process, and state governments would reimburse individual merchants for the cost of implementing the clearinghouse software.

"Government must collect taxes to pay for infrastructure and those things that are necessary for commerce. Trucks must have freeways, trains must have tracks and government must have revenue to make sure this infrastructure is in place. It's not free and we should can not continue to fool ourselves about that," said Shawn Bullard of the National Association of Counties.

The differing proposals reflect an increasingly bitter divide among members of the advisory commission, with growing "us against them" rhetoric being used in the debate.

Each side claims the others' position is unconstitutional. While state officials argue that the Gilmore and Kasich plans strip states of their authority to tax transactions that occur entirely within the state, Kasich argued that the Constitution exclusively grants to the federal government the ability to tax interstate commerce.

The 19-member Advisory Commission is set to meet in San Francisco on December 14 and in Dallas on March 20. The commission will discuss all submitted proposals at the San Francisco meeting and can only adopt resolutions after a two-thirds affirmative vote. After the Dallas meeting, the commission will have until April to submit their final recommendation to Congress.