NEW YORK-The Advisory Commission on Electronic Commerce is engaged in a monumental juggling act with significant implications for levies on telecommunications in general, judging by comments at its two-day hearing last week.
Charged by Congress with recommending whether and how Internet transactions should be taxed, the commission defines itself as being “tasked with producing what is arguably the most important policy initiative of the information age.”
The 1998 Internet Tax Freedom Act, which created the commission, placed a moratorium that expires Oct. 21, 2001, on new state and local taxes on Internet access and on multiple or discriminatory taxes on electronic commerce. The commission’s recommendations to Congress on electronic commerce and tax policy are due April 21, 2000.
“Whether through dial-up access or digital subscriber lines, over cable or wireless modems, access to the Internet takes place over a the telecommunications network,” Jeffrey A. Eisenach testified Sept. 14.
“Thus, high telecommunications taxes slow the spread of Internet access and discourage deployment of broadband networks needed for the next generation of Internet growth … Why would we single out the driving force for the digital economy?”
Eisenach is president of the Progress and Freedom Foundation, a think tank based in Washington, D.C., that analyzes public policy related to communications and computers.
“The convergence of previously separate telecommunications technologies-cable, telephone, satellite and wireless-into a single marketplace adds further urgency to the need for telecommunications tax reform,” he said.
“Each of these different industry sectors is subject to its own tax regime, meaning that the same service can be subject to very different tax treatment depending on the type of firm that offers it. Efforts to eliminate such inconsistencies are hampered by the extreme complexity of the system.”
Headquartered in Arlington, Va., the advisory commission is chaired by James Gilmore III, the governor of Virginia. Its other 18 members include C. Michael Armstrong, chairman and chief executive officer of AT&T Corp., and John Sidgmore, vice chairman of MCI WorldCom.
Another commission member, Robert Novick, general counsel for the Office of the United States Trade Representative Ambassador Charlene Barshefsky, received commission endorsement Sept. 14 for an international moratorium on country-imposed tariffs on electronic commerce. This issue is scheduled for review at the World Trade Organization meeting later this year.
Grover Norquist, a commission member who is president of Americans for Tax reform, also received informal approval of his recommendation to abolish the 3-percent federal excise tax on telecommunications.
“This tax was put in place to fund the Spanish-American War … and has continued to persist even though … the war has ended,” the resolution said in part.
Just counting the varied state and local levies, there is an average tax rate of 18 percent nationwide on telecommunications, compared with 6 percent on the sale of goods by general businesses, said Annabelle B. Canning, legislative counsel to the Committee on State Taxation, Washington, D.C.
COST, which has about 500 large corporate members, based its conclusions on a 50-state study involving these participants: Vodafone AirTouch plc, Alltel Corp., Ameritech Corp., AT&T, Bell Atlantic Corp., BellSouth Corp., Citizens Utilities Co., CommNet Cellular Inc., Frontier Corp., GTE Corp., MCI WorldCom, Nextel Communications Inc., SBC Communications Inc., Sprint Corp., U S West, VoiceStream Wireless and Western Wireless Corp.
Ed Shimizu, director of national regulatory relations for GTE, called for equalization of the levies imposed on cable TV operators and telecommunications carriers since the latter now bear a greater tax burden. He also said the commission should recommend a mandate that cable TV companies allow their customers to buy transport and Internet service provider services separately, instead of forcing them to buy both in a package.
“The (taxation complexity) situation is going to get dramatically worse,” he added.
“With bundled services, the question is `what is it-a telco, a cable TV company or an ISP?’ Those questions are getting answered in different ways by different courts.”
The issue of evenhanded tax treatment also is a bone of contention for non-Internet-based companies, which must charge and pay sales and other taxes for transactions that now get off scot-free when conducted on the Internet.
With projections of nearly $200 billion in electronic commerce sales by 2004, these businesses no longer can be viewed as a fledgling industry that needs cultivation with tax breaks, argued a position paper submitted by the National Association of Counties, the National League of Cities and The United States Conference of Mayors.
Taxware International, IBM Corp., Open Market, DPC Computers and Vertex Inc. all offer software that “can tax different products at different rates, can tax at all jurisdiction levels, can exclude tax-free products automatically (and) can accommodate special tax situations,” the organizations’ handout said.
Similarly, Dan R. Bucks, executive director of the Multistate Tax Commission, said the “issues of electronic commerce … can be solved in a manner that … preserves federalism and the sales tax as a viable fiscal choice for state and local governments … and (also) supports the vigorous growth of interstate commerce, including electronic commerce.”
Besides the software advocated by the local government groups, Bucks said states must voluntarily collaborate to develop standardized and simplified versions of key aspects of their sales and use tax systems. State and local governments also must be willing to finance implementation of these systems.
“The imposition and extension of taxes on e-commerce … could retard development in this area and jeopardize the contribution the Internet is having on the overall economy,” said R. Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce.
“On the other hand, if e-commerce goes untaxed, it disadvantages other businesses whose transactions and operations are subject to the tax. Finally, the projected growth of e-commerce, if left untaxed, threatens to substantially erode the tax base of many state and local governments.”
