Leveling e-commerce

The Advisory Commission on Electronic Commerce was appointed by Congress in October 1998 to study the impact of federal, state, local and international taxation and tariffs on Internet access and transactions. A key element of the task before this panel of trade, taxation, telecommunications and technology experts was to come up with a package of recommendations that could balance the conflicting issues evenly enough to earn the support of a two-thirds majority, or 13 of the 19 members.

In that, the commission failed. The final report it sent to Congress last week has the support of only 11 members. Coming up two votes short of the requested supermajority seems a small thing, but it does underscore the difficulty of reaching compromise when planet high-tech and the real world meet.

The commission reached easy agreement on the easy stuff — e-commerce should not be burdened with taxes not imposed upon Main Street businesses. Thus, it recommends repeal of the three percent federal excise tax on telecommunications. There should be a permanent prohibition on taxing Internet access by states or localities. The current moratorium on any new Internet taxes — state, local or federal — will be extended to 2006.

The commission did not do quite so well on the toughies; specifically, the lingering issue of sales tax collection. The best it could come up with was to recommend Congress “forge a meaningful pathway” (whatever that means) to the simplification of sales and use tax systems. Which is precisely where the issue stood 18 months ago.

This is an issue of profound interest to states and localities. It is estimated that within just the next year or two the lost sales and use tax revenue to untaxed e-commerce will exceed $15 billion. The devastation won’t be confined to state, county and municipal budgets: Main Street businesses, the businesses that pay property taxes, that create jobs, that support local good causes will be at an increasing disadvantage to businesses that consist of nothing but a bank of computers and a distant warehouse.

In fact, several proposals backed by the 11 do little more than demonstrate how fine the line between expertise and self-interest can be. A provision allowing media companies to sell movies, books, newspapers and music — either in digitized or physical versions — without state sales taxes was proposed by commission members who happen to be top executives of Time Warner and America Online, which are in the process of merging. A provision that allows customers to go into an actual store, place an order on an in-store computer, receive the good or service and have the transaction considered tax-exempt e-commerce came from the chairman of Gateway. A provision to prohibit states from collecting taxes on services, including stock brokerage, was offered by the president of Charles Schwab. The chairman of AT&T and vice-chairman of MCI Worldcom want a sales and excise-tax exemption for long-distance companies.

The executives on the commission deny, of course, that they used their positions to improve their bottom lines. “All we want is a level playing field,” said Gateway Chairman Theodore Waitt. Perhaps the next time Congress puts an all-star team together it will make room on the roster for those with state and local budgets to balance and with Main Street bills to pay.