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A plan that would effectively exempt billions of dollars in online sales from tax won narrow approval from a special national commission on Net taxation, which adjourned on Mar. 21, after what will probably be its last full-fledged meeting. But the proposal failed to win the two-thirds vote needed to be adopted as a formal commission recommendation. Nor did it win the support of most state and local officials or of Clinton Administration representatives, all of whom abstained from the final vote.
Even many of the panel members who voted for the plan -- it carried by an 11-8 vote -- could not agree on just what it meant. Struggling to forge a working majority, the panel left open the possibility of further compromise before it submits its report to Congress on Apr. 21.
The result: Congress, which created the commission to help it formulate a plan for handling taxation of the Internet, must now bridge the yawning chasm between those who believe that Internet sales should be taxed just like any other form of commerce, and those who insist it should be accorded special treatment.
MAIN STREET HEAT.
It's unlikely that Congress will do much more than hold a hearing or two on the issue this year. A 1998 moratorium on new Internet taxes will continue until 2001. Meanwhile, states will begin what promises to be a difficult effort to simplify their sales-tax rules. And politically powerful Main Street retailers -- largely silent until now -- will start to pressure lawmakers to make sure that online merchants have the same obligation to collect sales tax that they do.
Antitax commissioners are claiming a victory in the no-tax vote. "The good guys won," says Grover Norquist, president for Americans for Tax Reform. But other supporters of the measure have a very different view. John Sidgmore, vice-chairman of MCI-WorldCom, says, "I don't see this as an antitax proposal." And David Pottruck, president of Charles Schwab Co., thinks it reflects both views. "This is definitely a 'no new taxes on the Internet' proposal. But it is not a 'no sales taxes ever on the Internet' proposal."
If the plan ever did become law, it probably would free e-commerce from sales tax and inevitably kill off the levy as a way for state and local governments to raise money. It would exempt both digital products and their physical counterparts -- such as books, CDs, movies, software, and magazines -- from any sales tax. And it would allow merchants to set up in-store kiosks through which customers could buy products and avoid tax.
NASTY DIVISIONS.
Says the tax director of one large retailer that sells both through stores and online, and currently collects tax on all sales: "I'd recommend that we opt out [of sales-tax collections], just as our competitors would do." The governors claim the plan would cost state and local governments $25 billion annually in revenues. They now collect around $200 billion a year in sales and other such taxes.
The panel's 10 months of work created some nasty divisions. Mayors and governors accused business leaders of pursuing self-serving tax breaks for their own companies and industries. Business executives and antitax advocates insisted that state and local officials were simply looking for a backdoor way to raise taxes and charged that they could not be trusted in their vows to simplify their sales tax systems. "We've been hearing that for years," says Kay Caldwell, a tax lobbyist for CommerceNet, a business group.
And the debate is far from over. "This fight goes on," says Utah Governor Michael O. Leavitt. "This is just the beginning of the process." On that, if nothing else, every member of the commission could probably agree.
By Howard Gleckman in Dallas EDITED BY DOUGLAS HARBRECHT
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