U.S. Internet Tax Facing Deadlock

Instead of moving closer to a consensus on the issue of Internet taxation, the Advisory Commission on Electronic Commerce (ACEC) appears to be approaching deadlock as individual U.S. states discuss taking the matter into their own hands.

The panel, which was commissioned by the U.S. Congress, has firmly divided itself into two factions. Panel chief and Virginia Governor James Gilmore’s followers want a complete ban on Internet taxation, while Utah Governor Michael O. Leavitt and his supporters would allow states to decide how to tax online purchases.

Starts and Stops

Just recently, Gilmore debunked rumblings that he would accept a compromise position. The plan called for the current moratorium on Internet taxation to be extended for a period of five years, after which a simplified sales tax plan would be adopted by the 50 states.

Another member of the panel, Washington Governor Gary Locke, now proposes that any legislation that includes Internet taxation have definite protection for consumers’ privacy. Previous proposals would have simply advised Congress to look into consumer privacy issues.

As the proposals among committee members and between the two opposing factions become more stringent and defined, the panel moves further from its original goal of issuing a focused report to Congress.

States Weigh In

Meanwhile, a coalition of representatives from 28 states participated in a teleconference earlier this week to discuss issues related to taxing online sales.

According to Frank Shafroth, director of state and federal relations for the National Governors Association (NGA), this week’s meeting was “day one of moving forward” with efforts to collect taxes on items purchased over the Internet.

Shafroth claims that more states are anxious to get involved in the movement. He said that several states have raised the issue of Internet taxation, particularly in reference to potential tax revenues they may lose if online sales are not taxed. In the U.S., many states, cities and municipalities rely on sales taxes to pay for public works, city services and infrastructure expenses.

According to Forrester Research, online sales in the U.S. will grow to $184 billion (US$) by 2004. The loss of potential tax revenues, according to Forrester, could affect such essential services as police departments and road construction.

Commission Could Reach Stalemate

It now appears that the federal panel’s internal gridlock could force states to spearhead their own tax plans.

Any formal recommendation the panel makes to Congress has to have a vote of two-thirds of commission members, but insiders indicate that the necessary tally is currently unattainable.

By all accounts, the only hope for some type of decisive action and recommendation to Congress would be a compromise that would essentially toss the issue back to individual states. Under such a recommendation, states and municipalities would have to adopt a uniform sales tax structure that would be easy to implement by e-tailers.

The U.S. Supreme Court has already ruled that companies that conduct interstate business do not have to collect sales taxes, because the myriad tax rates amount to an unfair imposition on trade.

In any event, a lot of money is at stake. The U.S. Department of Commerce reports that in the fourth quarter of 1999, consumers spent $5.3 billion on e-commerce. While the department found that this figure was not a huge percentage of overall retail sales of $821.2 billion, it is growing rapidly and will soon represent a significant loss to local coffers if the issue is not resolved.