U.S. Panel Can't Agree on Internet Sales Tax

By David Cay Johnston

DALLAS, March 21 -- Amid bitter accusations that one company's desire for tax breaks for itself had blocked a consensus, the commission created to advise Congress on Internet sales taxes ended its last scheduled meeting today in failure.

The 19-member commission did reach unanimous agreement on one proposal, advanced by the chairman, Gov. James S. Gilmore 3rd of Virginia: that what it characterized as surplus welfare funds should be used to buy computers for the poor and to provide them with access to the Internet.

But on the main issue before the commission, applying sales taxes to the Internet, last-minute efforts to reach a compromise collapsed. A coalition formed last week between the five antitax members led by Governor Gilmore, a Republican, and the six business representatives held firm behind a proposal to defer taxing Internet sales until at least 2006.

Their 11 votes, however, fell short of the two-thirds margin, or 13 votes, required for a recommendation of the plan.

A dissenter, Gov. Mike Leavitt of Utah, also a Republican, said that in private talks Monday night and this morning on how to extend sales taxes to the Internet, the eight commissioners in his camp and the six business representatives had reached agreement on every issue but one.

His proposal called for simplifying the sales tax system -- for example, making product definitions consistent from state to state, and probably limiting each state to a single tax rate -- and applying that system evenly to Internet, phone and mail-order sales.

The deal-breaker was whether a company that sells over the Internet could have technicians to service its products, and stores to accept returned merchandise, yet remain exempt from sales taxes on products it sells to Internet customers.

Under existing law, when a company has a bricks-and-mortar presence or sales and technical agents in a state, it must collect taxes on sales in that state.

Governor Leavitt assailed this proposed new exemption as "a special benefit, a permanent privilege" that would allow such companies a competitive advantage by selling products without adding sales taxes.

"Will we have a sales tax system that creates permanent special privileges?" he asked. "Will we have a level playing field? You know we all hate taxes, but if we have to pay them, then at least they ought to be fair."

He said making an exception for a company and others who structure themselves in the same way would breed contempt for the sales tax and encourage cheating.

Neither Governor Leavitt nor Mayor Ron Kirk of Dallas, a fellow panel member who joined in the remarks, named any company. But Ted Waitt, the chairman of Gateway, acknowledged in an interview that the criticisms were aimed at his company, which makes personal computers and related products and sells them both over the Internet and in stores.

Mr. Waitt, one of the six business representatives on the panel, disputed Governor Leavitt's and Mayor Kirk's description of Gateway's position, adding, "We did not seek any special tax privilege for ourselves." He said there were at least four unresolved issues "that could have been resolved, but there just wasn't time."

The commission's members, drawn both from government and private industry, divided into three camps -- the five antitax members, led by Governor Gilmore; the six representatives of businesses, all with major Internet interests; and the eight others, mostly from government at various levels and led by Governor Leavitt, who say that the way an item is sold should have no effect on how it is taxed.

The stakes are high. Sales taxes are the largest single source of revenue for state and local governments, approaching half the money they take in. And many officials fear that as sales migrate to the Internet, that revenue will be lost, forcing higher income and property taxes.

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Amid cries of special pleading, no faction is able to muster the two-thirds required.

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While today's meeting was the commission's last scheduled one, at the urging of a member, C. Michael Armstrong, chief executive of AT&T, the commission changed its rules to allow an additional meeting in the next 30 days by telephone conference call. Mr. Armstrong said he wanted to leave the door open to a possible settlement, adding that the only issue blocking settlement was one that did not affect his company.

That open door could also result in votes on two tax breaks Mr.Armstrong seeks for AT&T and which, if voted on separately, would win the backing of 16 commissioners and perhaps all 19. They would eliminate the 3 percent federal excise tax on telephone service -- adopted as an emergency measure to finance the Spanish-American War in 1898, at a time just a handful of people had telephones -- and reduce the overall taxes on phone companies since they are no longer regulated monopolies.

And negotiations that could yet result in a consensus plan to tax Internet sales continued last night as Mr. Waitt and Mayor Kirk met here to continue their talks.

The creation of the panel, formally known as the Advisory Commission on Electronic Commerce, was sponsored by members of Congress seeking to exempt the Internet -- as a vehicle of interstate commerce -- from sales taxes. In October 1998, Congress placed a three-year moratorium on any new, multiple or discriminatory taxes on Internet dealings and then appointed the commission, which was expected to recommend a no-sales-tax policy.

But the representatives from business offered a plan that assumed Internet sales would be taxed, and last week they were near an agreement with the Leavitt camp that would have resulted in 14 votes, more than the two-thirds needed, in favor of creating a "level playing field" for taxing sales by phone, mail order or over the Internet.

Then, the six business executives broke with the Leavitt camp and aligned themselves with Governor Gilmore, who on Monday put together 11 votes for the proposal to defer taxes until 2006.

The eight members of the Leavitt camp abstained from voting on most issues to protest Governor Gilmore's decision to send a report to Congress without the two-thirds margin required to recommend the plan.

Copyright 2000 The New York Times Company