E-commerce panel nears consensus on barring Internet access tax

Wednesday, December 15th 1999, 12:00 am
By: News On 6

SAN FRANCISCO (AP) -- A federal commission declined Wednesday to take a stand on prohibiting Internet access taxes and repealing a century-old telephone tax, despite broad support for both measures.

On a 10-5 vote, the Advisory Commission on Electronic Commerce decided to put off both questions until its final March meeting in
Dallas -- where it also must decide what recommendations to make on the more controversial issue of sales taxes on e-commerce.

Gene LeBrun, a commission member and former South Dakota state legislator, said voting on access and telephone taxes now would amount to a "piecemeal" approach to the larger issue. Clinton administration officials also said it was premature to vote on the access and telephone taxes.

Joseph Guttentag, a senior Treasury Department tax adviser, said repeal of the telephone tax would cost $52 billion over 10 years and force difficult government spending decisions.

"There is some merit" to the repeal, he said, but only if considered as part of the broader federal budget.

"Budget cuts have to be paid for," said Andrew Pincus, general counsel for the Commerce Department.

Nevertheless, several commission members said there was broad agreement that the panel's final recommendations to Congress should include some kind of ban on Internet access taxes and repeal of the telephone tax.

"I think those are places where a consensus, in fact, is developing," said Gov. Jim Gilmore, R-Va., the panel's chairman.

"On the question of the sales tax, there is much debate left to be done."

The tentative recommendations to Congress would:
--Permanently bar federal, state or local taxes on the monthly charges people pay for Internet access. Such taxes in a handful of
states were exempted from a three-year federal Internet tax moratorium if they were in place before Oct. 1, 1998.
--Abolish the 3 percent federal excise tax on telephone service, first imposed in 1898 as part of the Spanish War Act. Initially a
luxury tax when there were few phones, it now raises about $4 billion annually for the federal government.

"These are a series of small steps in the middle we can take," said Grover Norquist, a commission member and president of
Americans for Tax Reform.

The commission plans a final meeting in March, with its report to Congress due in April. The unresolved central question is whether the 46 states that impose sales taxes should be allowed to extend them to Internet purchases.

The National Governors Association, joined by organizations representing state legislators, counties and cities, urged the commission to reject proposals that would prevent sales taxes on e-commerce.

Such an exemption, they said, could endanger vital government services, force states to raise other taxes, and would give
Internet businesses an unfair competitive edge over traditional brick-and-mortar sellers.

"What we are doing right now is creating a loophole, an unfair loophole," said Gov. William Janklow, R-S.D. "Success in America
should not be based on a loophole."

The state and local governments want to set up a voluntary e-commerce sales tax system in which states would gradually adopt a
single statewide rate. A "trusted third party" would use software to collect and distribute the money based on the location of the

Opponents said the plan raises serious privacy questions because of the "third party" collector and that it is unfair for states to tax people who live somewhere else. There is also no evidence that e-commerce is eroding state budgets, most of which are now awash in surplus cash, say opponents of the plan.

"I just don't buy it," said Dean Andal, a commission member and chairman of the California Board of Equalization. "There is no
evidence of significant revenue loss."

Siding with the states, 49 tax experts from universities across the country also asked the commission not to permanently exempt
Internet commerce from sales taxes.

"Once electronic commerce has become an established retail channel, it should not be treated differently than other commerce," said George Zodrow, a Rice University economist.