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Tracey S. Roth

Dot Com Commerce

Managing Editor, [email protected] CENTER Solutions

[September 22, 1999]

Joining The Boston E-Party

We have a history of hating taxes in America, and now there are some potential new taxes to hate. Results of a recent poll conducted by Gallup and At Plan Inc. indicate that a great majority of those individuals who use the Internet are strongly opposed to any form of taxation on e-commerce. This survey also discovered that 35 percent of respondents would be less likely to vote for a political candidate who supports taxation of goods and services purchased on the Internet. This is news that any self-respecting political candidate is likely to pay attention to, particularly so close to November elections. I do take most surveys with a grain of salt, however. I don't imagine that if I, as a pollster, walked up to the average passerby on a street and said, "Excuse me, but are you in favor of a new tax?" John or Jane Passerby's response would likely be, "Why, yes, please! I'm always looking for something new to pay taxes on." Doesn't happen. But there are some thought-provoking issues here.

Peter Arnold, executive director for a Washington, D.C.-based group called Hands Off The Internet (HOTI), had this to say about the results of the poll: "This new study is a shot across the bow, and a clear warning signal to all state and local officials. It is clear; the growing and active Internet constituency will rise up against attempts by government to place any sort of discriminatory taxes. The Internet constituency will take a hard look at government officials exploiting online business and Net consumers all for the interest of new tax revenue." Wow. I think Sam Adams said something similar right before he and others dumped caseloads of tea off a British supply ship into Boston harbor.

This topic was brewing in my head one recent morning. I was lying in bed trying to avoid hitting the "snooze" button again when I heard the beginnings of a report on National Public Radio. It effectively kept my finger off the "nine more minutes of covers over my head, please" button. NPR ran the report not only because of the amount of interest this issue has drawn, but because of the mid-September meeting in New York City of a group called The Advisory Commission on Electronic Commerce, which was established by Congress to explore the necessity (or lack thereof) of taxes on goods and services sold via the Internet. The Commission comprises industry players, trade lobbying groups and local, state and federal government officials who sit on both sides of the fence of the taxation issue. Included on the board are James Gilmore, Governor of Virginia; Michael Leavitt, Governor of Utah; Gary Locke, Governor of Washington; Ron Kirk, Mayor of Dallas; Robert Pittman, President and CEO of America Online; Richard Parsons, President of Time-Warner; Michael Armstrong, CEO of AT&T and Joseph Guttentag, Senior Advisor for the Office of Tax Policy of the U.S. Treasury Department. Very big cheeses, one might say.

The advisory board was essentially created by a document called The Internet Tax Freedom Act, a tract wordy enough to put a severe insomniac to sleep for nine days, but which touches on a host of issues which are likely to heat up in the near future. Perhaps the most notable point is that the Act currently places a three-year moratorium on "multiple or discriminatory taxes on electronic commerce," which is given to mean double taxation or taxes that would not occur through other, non-electronic channels. Moratoriums are often enacted by government officials to imply that they are clueless about an issue and intend to study it further, but until such time, no one else is allowed to mess with the topic. Hence the creation of the Advisory Commission. The Commission's decision will be presented to Congress on or before April 1, 2000. The moratorium is due to expire on the first of October, 2001.

To cut to the issues, here are the key points. The Internet has no boundaries. If I buy a turkey and provolone sandwich here in Connecticut, the sandwich got made in Connecticut and Connecticut taxes apply. The potential for double-taxation becomes strong if I order the sandwich online from a company in Kansas, which of course, wants a cut of the sale of my turkey sandwich. The state of Connecticut, where I consumed my sandwich, would be interested in having a cut of it, as well. Apply borderless Internet buying to interstate sales, business-to-business value-added considerations or international trade and tariff rules, and you've got a big mess on your hands.

But states (and even counties within states) have the right to make their own tax laws, and the Federal government is extremely unwilling (and unable, according to our bewigged Founding Fathers), to step on the toes of the states. Additionally, a recent Ernst & Young study put together an interesting tidbit that in 1998, sales over the Internet accounted for about $170 million worth of lost state and federal taxes. With e-commerce growing exponentially, that number will only get much, much larger.

So what to do? That's up to the Advisory Commission. Problem is, according to conventional wisdom, the members of the commission are so divided on their opinions of the subject their meetings resemble less a civilized debate and more a meeting of the Continental Congress, circa 1776.

If power is handed to the states to regulate e-commerce taxation in their own unique ways, the complexity of honoring 50 plus different methods of calculating tax might be enough to put a great deal of smaller e-commerce companies out of business, thought it admittedly would open a niche for tax consulting services and software to enable calculations that would make NASA's head hurt.

Some companies have shown evidence of gearing up for the possibly. Accounting, tax and consulting firm KPMG recently announced that it has formed a new e-commerce tax services practice. As soon as the Advisory Commission on Electronic Commerce hands down its decision in April 2000, KPMG plans to be ready to roll out these timely consulting services.

My research also came up with the fact that we are far from alone in the Internet taxation mire. It seems that every developed country on the face of the planet is currently wrestling with the problem.

To most Americans, the issue is largely academic at this point. Relatively speaking to the general populace, few people currently buy enough off the Internet for it to really matter and most are willing to pay for the convenience. A few years down the road, however, we could see a new American Revolution in progress…albeit without the tarring and feathering this time.

So…what would Samuel Adams do?

Tracey S. Roth welcomes your comments at troth@tmcnet.com.

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