E-(Tax) freedom fizzles amid special interests of Commission- member factions

WASHINGTON-Congress asked them to deliver a study about taxing online sales... and no one was surprised when they couldn't reach an agreement. The Advisory Commission on Electronic Commerce, a 19-member group formed in 1998 to study the Internet tax issue (CU Times, Jan. 12) closed its sessions in disagreement, divided by those who sought to extend the exemption until 2006 and those brick-and-mortar proponents who claimed it was an unfair advantage over retailers. In the end, Chairman James Gilmore (Governor of Virginia) submitted a report to Congress without having won the two-thirds vote required to recommend a proposal. Recently, an all-out push by retailers and local government leaders forced Senator John McCain (R-Ariz.), former presidential candidate and Chairman of the Senate Commerce, Science & Transportation Committee, to postpone a vote to extend the exemption contained in The Internet Tax Freedom Act of 1998. But there may be a bug in that computer law, say some state taxing authorities. According to Jim Zingale, executive director of the Florida Department of Revenue, the law does not apply to consumer and business purchases made over the Internet. It only forbids states from collecting sales tax on Internet access charges-the monthly fee paid to Internet providers such as America Online, CompuServe or other ISPs (Internet Service Providers)- and leaves the requirement of paying "use" taxes to the buyer. Until now, buyers have been blissfully ignoring that burden in much the same way that catalog buyers who purchase from out-of-state sellers like L.L. Bean and others have usually done. That party may be over soon; but it likely will not be consumer-driven buying that dooms it. Rather, it'll be the business-to-business driven purchases. For while estimates put consumer online buying at 1%-2% of total sales ($30 billion retail), B2B sales estimates may represent three-fourths of total Internet sales. State and local governments are fearful they may lose as much as $10 billion per year in tax revenue in the next three years. A series of U.S. Supreme Court decisions put the tax payment responsibility on buyers after states sought to have catalog businesses collect sales tax. The Court ruled that unless a company had substantial presence in that state (a retail store or warehouse) mail order companies did not have to collect tax. Few buyers pay it voluntarily, and individual sales are almost impossible to track (yet) so most state authorities have just let it go. But B2B commerce is another story. For an individual business that fails to pay use tax on online purchases, an agency auditor may impose payment of back taxes, penalties and interest, according to Zingale. The Net tax debate picked up steam during the presidential primary season when McCain challenged all other candidates to make the perceived moratorium permanent. In mid-January, he signed an "E-Freedom declaration" promoted by an anti-tax group called Citizens for a Sound Economy, but George W. Bush refused to buy or byte. The now-expected Republican nominee said he supported an extension from three to five years on the exemption, but offered that the marketplace was too unpredictable to warrant a permanent tax ban. Most state governors (Bush is governor of Texas) favor an imposed Net tax The most positive suggestions made by the Commission are that states streamline their tax structure in preparation for an eventual agreement; that the 3% federal excise tax on phone companies be repealed because they are no longer regulated monopolies; and that any surplus funds generated from lower welfare costs be used to provide computers and online access to low-income Americans. -caburger@cutimes.com