May 2000

E-commerce Commission Proposes Extending Tax Moratorium

Governors Criticize Report

The Advisory Commission on Electronic Commerce recently voted 10 to 8 to extend the current Internet tax moratorium for five years. The current three-year moratorium is set to expire in September 2001.

In its final report, the commission also recommended repealing the 3 percent federal excise tax on telecommunications services and prohibiting states or localities from taxing Internet access subscription charges. In addition, the report acknowledged the need to simplify state sales and use taxation systems before municipalities can adequately address Internet tax issues. This includes clarifying nexus standards that impact the obligation of businesses to collect and remit state and local taxes on remote transactions.

"I am pleased that we were able to come to a majority decision on these key public policy issues," said Virginia Gov. and commission Chair James S. Gilmore. "The commission's final report will provide an invaluable resource to the Congress as it deliberates key Internet questions. These issues will have a profound impact on every citizen of our country."

House Speaker Dennis Hastert said he will introduce a bill shortly to extend the Internet tax moratorium and legislate the commission's other findings.

Internet Tax and Politics

The commission has received criticism from several parties, including more than two-thirds of the nation's governors, who jointly signed a letter to Congress denouncing the report and warning that the recommendations interfere with states' sovereignty.

The governors' action is among the more recent signs that Internet taxation and other e-commerce concerns are fast becoming hot political issues. Major party presidential candidates Texas Gov. George W. Bush and Vice President Al Gore support extending the tax moratorium, and Gov. Bush did not sign the letter. Gov. Pataki also was among those who did not sign the letter.

Appointed by Congress in October 1998 as part of the Internet Tax Freedom Act, the 19-member commission studied the impact of federal, state, local, and international taxation and tariffs on Internet transactions. Congress created the commission in an effort to develop a strong stance against Internet taxation, but the advisory group--whose members include representatives from government, industry, technology associations, and other interested parties--could not reach a consensus.

The commission approved its report by a simple majority instead of the two-thirds majority many members initially believed necessary according to their edict from Congress. Since the commission could not reach a two-thirds majority, Gilmore and others moved to find a way around the super majority rule and therefore avoid not issuing any findings. With support from the commission's attorney, Gilmore noted that the commission could approve a "report" without the super majority required by that law and that only "findings and recommendations" required a two-thirds vote.

Utah Gov. Michael Leavitt was among the commission's members who criticized the attorney's interpretation and a driving force behind the governors' letter. The New York Times recently reported Leavitt saying that governors who signed the letter "see this as the most significant federalism issue we have faced in this country."

The commission also stressed the need to ensure that all Americans can participate in the Internet economy, addressing what many have termed the "digital divide," and recommended assessing any privacy and security concerns related to consumers' personal information in the examination of any proposed e-commerce taxes. *