INTERNET TAXATION: Yes to tax reform

But government commission has yet to discuss types of changes

Time is running out for the Advisory Commission on Electronic Commerce (ACEC). The government-appointed group assigned with investigating Internet taxation policies has only two more meetings left before it makes its proposal to Congress in April 2000. And it spent much of its previous meeting, held Sept. 14 and 15 in New York, discussing the need to reform the current tax system – but it didn’t discuss how.

The majority of the ACEC panelists, as well as speakers representing telecommunications companies, tax associations, consumer groups, local government organizations, and small businesses, felt that there should not be a tax exclusive to the Web. But they also felt that online commerce should not be tax-exempt, as is the case (at least until 2001) under the Internet Tax Freedom Act. Instead, most participants agreed that online commerce should be incorporated into the tax collection system, which in turn needs to be reformed and simplified. “We have the opportunity to rethink a current tax system that will complement growing technology,” said ACEC speaker Bruce Josten, executive vice president of government affairs at the U.S. Chamber of Commerce.

The next step for the commission is determining whether reforming the way sales taxes are collected is even feasible. At the urging of ACEC member Gov. Michael Leavitt (R-UT), the commission unanimously voted to invite various industries to submit detailed proposals for modifying the current method so that the multiple states can collect sales taxes from out-of-state Internet, catalog, and phone sales.

What about Quill v. North Dakota?

Some catalogers fear that enabling states to easily collect sales taxes from out-of-state businesses will lead to the overturning of Quill v. North Dakota. That 1992 Supreme Court ruling said that a business is required to collect local sales taxes only from buyers who reside in a locality in which the business has nexus, or a physical presence.

“It seems that the state and local governments are using this commission and tax issue as an opportunity to revisit the nexus issue,” says Robin Lebo, director of customer acquisition at electronics products catalog Crutchfield, and cochairperson of the Association of Interactive Media’s Online Shopping Council. “The concern is that the Quill decision will go by the wayside if members start debating language and interpretations of the ruling to include the Internet.”

But most of the ACEC members believe that the past congressional support for Quill will allow the ruling to stand. In fact, commission member Dean Andal, vice chairman of the California State Board of Equalization, proposed a resolution calling for the creation of a single nationwide standard that would tax online sales according to physical presence, in keeping with the Quill decision. The commission has yet to vote on the proposal.

Catalogers aren’t the only ones anxious about the commission’s agenda. Prior to the meeting, three dozen Republican members of the House of Representatives wrote a letter to the ACEC expressing their concern that the panel was examining “how to tax the Internet, rather than whether to tax the Internet.” The letter also noted that “there are many members [of the House] who will oppose any new taxes on the Internet.”

Indeed, any change to the collection of Internet or mail order taxes could hurt sales, if a recent survey by the Information Technology Association of America is any indication. Of 1,000 consumers, 34% said they would be less likely to buy via the Web or mail order if sales taxes were collected.

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