Commission Probes Taxation

25 June 1999
The Internet cannot remain tax-free forever, the majority of the members of the Advisory Commission on Electronic Commerce decided Tuesday. The U.S. congressional Internet tax study panel was appointed to recommend a future tax policy for the Internet by April 2000. A three-year moratorium has already been imposed on new federal, state and local e-commerce taxes, which expires in October 2001.

"We must not allow the Internet to become a tax haven that drains the revenue governments need to provide the services that citizens demand,' said commission member Joseph Guttentag, a top Treasury Department official.

Other government officials on the panel agreed, as well as most representatives of the business sector. Most of the controversy between public and private realms revolved around the question of whether state sales taxes on store purchases would be imposed on similar Internet sales.

"I don't know if it's possible in the long term to tax one form of commerce differently than another form,' said John Sidgmore, a panel member and vice chairman of MCI Worldcom.

Both public officials and business representatives agreed that e-commerce taxes must not hinder the industry's growth or allow the government to pry into private transactions. They also said that taxes on the Internet should be no different from those on other forms of commerce.

"Our challenge here is not to restrain the growth of the Internet but to allow the Internet to flourish," said commission member David Pottruck, president of Charles Schwab Corp. "We need to find the balance. Governments need money. Tax systems need to be fair."

In 1998, only about $170 million in sales taxes were lost due to Internet sales, according to a study released by the Ernst & Young accounting firm. That compares to over $4 billion in sales taxes lost to mail-order sales.

The study also found that the majority of today's e-commerce is either business-to-business, which is not subject to sales taxes, or involves tax-exempt transactions such as travel or financial services.

Total consumer retail Internet spending accounted for less than one percent of total U.S. consumer spending, estimated Ernst & Young. Also, the $170 million lost in sales taxes is only a tenth of a percent of total U.S. collections.

"I can't find any support for the 'Chicken Little' claims that the tax system is hemorrhaging,' said Peter Merrill of the Pricewaterhouse Coopers accounting firm.