Internet Tax Commission Moves to Break Impasse

The Advisory Commission on Electronic Commerce (ACEC) begins its fourth and final session in Dallas, Texas today, with no sign of an agreement on how, or whether, to tax e-commerce.

Before the ACEC can make a formal recommendation to the U.S. Congress about taxation, a supermajority of 13 votes is required by the 19-member panel. At this time, analysts say that no faction within the panel has that many votes.

One recent plan put forth by the business caucus, according to observers, may have as many as 11 votes. However, the tally is not enough to send a formal recommendation to Congress.

The business caucus has submitted a compromise proposal that would extend the moratorium on Internet taxes for five years, while states are encouraged to simplify their sales tax structures to allow for some type of taxation. The compromise proposal itself, however, has generated controversy.

About the only thing that the panel seems agreed upon is a recommendation to end the three percent federal excise tax on telephone calls which, as one commissioner dryly noted, was originally enacted to help pay for the Spanish-American War of 1898.

“This tax has persisted even though by last count the war has ended,” Commissioner Grover Norquist said in his proposal.

Tax Chaos

The commission has developed three primary factions. One group, led by Virginia Governor James Gilmore, has consistently opposed any taxes on Internet sales. Gilmore was believed to be willing to explore a compromise at one time, but quickly denied the report.

The second faction consists of state governors who support developing taxes on Internet sales. These governors see such taxes as inevitable, particularly since online e-tailers would have an advantage over brick-and-mortar retailers.

The third faction is the business members, who have tried to develop a compromise between the two opposing government camps. The compromise itself, however, is complicated.

Weighing In

Last Friday, the influential Internet Tax Fairness Coalition (ITFC), an advocacy group that fights for fairness for businesses and consumers, weighed in against the specifics of the business caucus proposal.

The ITFC, however, said it supports a compromise agreement that “levels the playing field for all retailers.” A moratorium on Internet taxes benefits pure e-tailers far more than brick-and-click e-tailers who still have to charge sales taxes when they have “nexus,” which is a physical presence in the state where the customer resides.

Commission Is Key

Analysts seem to agree that if the Commission cannot devise some compromise, Congress is unlikely to take any action.

The lack of agreement, however, does not belie a lack of ideas. In addition to the proposals that it has heard already, the commission is slated to consider a number of suggestions from its members as it drafts its final report today and Tuesday.

The idea that has generated the greatest appeal is extending the moratorium while having states simplify their sales tax structures. The proposal holds political appeal, but is viewed as far easier to talk about than to implement.

Citizens in states with no sales tax or low rates will be loath to agree to pay higher sales taxes, while states with higher rates will not willingly allow those rates to be cut.

To complicate the matter further, many U.S. towns and cities use sales taxes — or the lack thereof — as a major competitive weapon to lure new businesses and attract residents. A simplified structure might threaten their ability to provide such incentives.

Without such sales tax simplification, however, it is unlikely that Congress will rush to impose the burden of paying sales tax on Internet sales. Indeed, the U.S. Supreme Court has already deemed it unconstitutional for states to require mail order merchants to collect sales taxes on out-of-state sales because the sheer complexity is too burdensome on interstate commerce.

The committee is to submit its report to Congress on April 21st. Based on the current disunity, however, it is not even clear if the committee can agree on a report, let alone a solution to the tax issue.