Busting the Web tax logjam

With about two months remaining before the Advisory Commission on Electronic Commerce must report to Congress on the issue of taxing Web sales, a caucus of Internet players, including America Online, AT&T, MCI WorldCom and Gateway, has presented a compromise proposal that may break the deadlock in which the commission finds itself mired.

Composed of representatives from the high-tech industry and state, local and federal government, the ACEC is stymied after months of conflicting testimony about the effect of an Internet sales tax. Sales tax does not apply to out-of-state purchases, and e-tailers don't want to give up that edge over their bricks-and-mortar competition. Meanwhile, conventional merchandisers complain of discriminatory practices, and state officials fear that expanding e-commerce will siphon more tax revenues out of their coffers.

Federal representatives on the commission have not indicated how they're leaning, but analysts suspect that presidential candidate Vice President Al Gore would be glad to have them come out against a Web sales tax. That would give the "father of the Internet" an effective counterpunch against the "hands-off-the-Web" appeal of Republican contender Sen. John McCain.

The proposal, advanced last week, tries to walk a line between taxing every Web sale and taxing none. It would extend the current moratorium on new Internet taxes for five years and ban any tax on raw Internet access. But it also would require state and local governments to collaborate on a uniform, simplified sales tax act by 2004 and to monitor the effects of such taxes on e-commerce revenues.

The business group's plan also would avoid taxing the items people most commonly buy online - books and music. Instead, it would placate conventional retailers by lifting the sales tax from the "non-digitized versions" of these products on the theory that it makes no sense to tax the sale of a compact music disc but not the download of the same tunes via MP3 files.

Most commission members are reserving comment on the proposal, which inevitably will get a full discussion at the ACEC's next and final meeting in Dallas next month.

"We believe it's a good compromise," said an AT&T spokesman. "It's a pro-consumer outcome, and we're hoping to build support for it."

Observers count five votes on the 19-member ACEC for imposing tax on Internet sales and five against. Approval of any plan requires 13 votes, so the caucus' six votes could hold the key to resolving the stalemate - if the compromise pleases either faction.

It's unlikely to find favor with ACEC Chairman Gov. James Gilmore, R-Va., a state that has benefited from Internet-centered industries such as AOL. A week before the caucus submitted its proposal, Gilmore said any suggestion involving a sales tax on Internet purchases from an out-of-state vendor "is not good and is not an acceptable part of the compromise."

Some states already impose a tax of sorts on out-of-state Web sales. When the Supreme Court ruled that states could not impose sales tax on such purchases - because vendors cannot cross state lines to collect taxes from customers - many states began applying a "use tax" on goods bought out of state but used within its borders.

But collecting use taxes may be an exercise in optimism.

To avoid such futile measures, the National Governors Association has suggested that the collection of Internet sales tax could be farmed out to a third party.

But that drew scorn from Massachusetts Governor Paul Cellucci, speaking before the Senate Commerce Committee earlier this month. "Just what we need, another IRS."