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Wednesday, 15 March, 2000, 18:00 GMT
Internet tax battle
Duty-free shop
Many in US want duty-free principle to apply on internet
By BBC News Online's Kevin Anderson in Washington

The United States was born out of a tax revolt, and a new battle is shaping up over taxes, as state and local governments try to sort out whether to tax retail sales on the internet.

A commission established by Congress in 1998 to study the issue has now broken into two factions in the lead up to its final meeting, before sending its recommendations to Congress on 21 April.

One faction is led by commission chair James Gilmore III, the conservative Republican governor of the state of Virginia.

His proposal would make permanent a temporary ban on internet taxes.

Ruled out

In 1992, the Supreme Court ruled that no local or state body could collect taxes on sales outside its borders unless the company had a significant physical presence in its city or state.

Congress would have to pass an act to circumvent that ruling, a move which Governor Gilmore does not support.

Governor Gilmore and his supporters, both on the commission and in Congress, say that retail sales on the internet are still dwarfed by bricks and mortar stores, and that the internet needs to be as free from taxation and government regulation as possible.

"All the sales for the year on the internet to consumers don't equal the retail sales of Wal-Mart in one weekend," said Tom Bliley, who chairs the Commerce Committee in the House of Representatives.

The other faction is led by Republican governor Mike Leavitt of Utah, who supports allowing states and cities to collect taxes on retail sales on the internet.

In the US, consumers spent about $20bn online in 1999, double the amount of the year before, according to Forrester Research.

As retail e-commerce has grown, Governor Leavitt, who heads the National Governor's Association, believes that state and local governments are losing revenue that they need to fund schools, roads and local law enforcement.

Decision in doubt

The rift means that the commission might not come to agreement on a recommendation to Congress.

Governor Gilmore estimates that about five conservatives on the commission support his position, while seven members of the panel support Governor Leavitt's position.

Complicating the situation, the six business representatives on the panel have introduced some of their own proposals.

Governor Gilmore said that he could not predict an outcome, adding that the situation was "fluid".

Election year politics

Mr Bliley said: "I don't expect any bills, even if [the commission] were to recommend taxation to pass this year.

"This year is an election year, and you usually don't have tax increases during an election year."

Mr Bliley supports extending the current moratorium but does not support making that ban permanent.

Internet taxation has become a big issue in the presidential campaign this year.

Republican candidate George W Bush and Democratic candidate Al Gore have both said that they are waiting for the recommendation from the commission, but they both favour extending the current moratorium.

Borderless dispute

The dispute does not stop at the borders of the US.

Governor Gilmore believes that the US should work to expand a ban on retail sales tax to other countries.

In a speech before the Global Internet Summit this week, Governor Gilmore said: "I believe that we should seek an international order that frees individuals from taxes and tariffs which detract from the quality of life of the people of the world."

The conference brought together more than 900 representatives from business, government and education from around the world.

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See also:

17 Feb 00 | Business
Surfers save on tax
01 Mar 00 | Business
US economy breaks record
18 Feb 00 | Business
US trade gap jumps 65%
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