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Wednesday, 22 March, 2000, 06:40 GMT
Internet tax tangle

A US commission on e-commerce has failed to agree on whether and how purchases on the internet should be taxed.

Instead they have recommended that the current three year moratorium on such taxation be extended.

The decision has been closely watched by an industry which believes that the US decision will set the pattern for e-trade elsewhere in the world.

Eleven of the 19 member Advisory Commission on Electronic Commerce voted in favour of extending the moratorium on internet sales taxes by five years.

However, this fell short of the qualified two-thirds majority of 13 members needed to turn their report into a formal recommendation to US Congress.

The panel could agree only on a permanent ban to tax internet access, calling on Congress to scrap a 102-year-old telephone tax as well. This 3% tax was introduced in 1898 to finance the Spanish-American War.

Sales tax confusion

Internet retailers currently need to collect sales tax only if they have a store or warehouse in the same US state as the purchaser. Other buyers do not have to pay sales tax.

This means that there is a 5% sales tax added to the cost of any book bought at a high street store in Washington DC - but the same book bought from an online retailer is free of sales tax.

The de facto tax-free position has given a huge boost to e-commerce in the US.

But traditional sales taxes generate about $150bn a year for local and state governments, and its absence on the fast growing e-trade market will create a big hole in state finances.

Many governors and mayors across the US also fear that their spending plans will disappear into cyberspace.

Bricks-and-mortar retailers are worried too. The current tax moratorium for online retailing is giving their competitors an extra advantage.

For both groups, the result of the commission's proceedings are a big set-back. They had hoped for a recommendation that "real" and virtual stores should apply the same sales taxes.

The advocates of online trading argue that the range of sales taxes levied in the 50 states is confusing and costly to administer. Pricing goods on web sites would become nearly impossible.


The mayor of Dallas, Ron Kirk, was the only commission member to vote outright against the proposal to extend the tax moratorium, which had been submitted by the business caucus.

The proposal had been drafted by representatives of telecoms giants AT&T and MCI Worldcom, computer maker Gateway, online share broker Charles Schwab, and internet and media partners America Online and Time Warner.

Governor James Gilmore of Virginia, the commission's chairman and a tax opponent, said the results of the votes woud be reported to Congress.

Ultimately, e-commerce firms hope that they can persuade US state governments to harmonise their sales taxes across the country so that online retailers can levy.

The inability to reach agreement means that the issue is likely to become a high-profile issue in the Presidential election.

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15 Mar 00 | Business
Internet tax battle
12 Apr 99 | Sci/Tech
E-trade stuck at EU borders
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