Fight over Net taxes creates factions

WASHINGTON -- Strong factions have begun to coalesce within the commission appointed by Congress to determine how -- or whether -- to apply state and local taxes to Internet sales.Companies such as America Online Inc.

WASHINGTON -- Strong factions have begun to coalesce within the commission appointed by Congress to determine how -- or whether -- to apply state and local taxes to Internet sales.

Companies such as America Online Inc. (NYSE:AOL) and Time Warner Inc. (NYSE:TWX) are adamant about no taxes, while Gateway Inc. (NYSE:GTW) and MCI WorldCom Inc. (Nasdaq:WCOM) have argued that some degree of taxation is necessary.

The Internet-tax fight was expected to shape up as a clash between high-tech companies, which largely oppose new taxes on Internet sales, and state and local governments, which are eager to tap a new revenue source. For a host of reasons, that isn't how the battle lines have been drawn.

Members who support modest reductions in existing -- though largely ignored -- taxes on interstate purchases are the commission's chairman, Virginia Gov. James Gilmore; Dean Andal, chairman of the California Board of Equalization; Paul Harris, a delegate in the Virginia legislature; Stanley Sokul, a representative of the Association of Interactive Media; Richard Parsons, president of Time Warner; Grover Norquist, president of Americans for Tax Reform; and Robert Pittman, president of AOL.

An equally strong contingent apparently favors applying the existing sales taxes and possibly creating new taxes. This faction includes Utah Gov. Michael Leavitt; Dallas Mayor Ron Kirk; Washington Gov. Gary Locke; Gene Lebrun, president of the National Conference of Commissioners on Uniform State Laws; John Sidgmore, vice chairman of MCI WorldCom, and Gateway Chairman Ted Waitt.

Corporate battle lines
Taxes on Internet sales won't likely affect MCI WorldCom's telecommunications services business, and Gateway could gain competitively if the taxes are applied, said Bill Whyman, an analyst with investment firm Legg Mason Inc. That is because Gateway, which has retail stores in many states, competes directly against Dell Computer Corp. (Nasdaq:DELL), which sells PCs mostly over the Internet or by telephone. On the other hand, commission members from California and Virginia, which have thriving high-tech centers, don't want to see their constituent firms taxed.

The commission's six other representatives, including AT&T Corp. (NYSE:T) Chairman C. Michael Armstrong, haven't indicated where they stand. The 19-member commission, which needs a super-majority of 13 votes to pass its conclusions, was formed last fall when Congress passed a three-year ban on new Internet sales taxes. It has seven members from the high-tech industry, nine from states and municipalities and three from the Clinton administration. Congress gave the group, formally known as the Advisory Commission on Electronic Commerce, until April 2000 to submit a prescription for treating the problem.


'Any corporate guy that comes out for a tax increase, we're going to name the tax after him.'
-- Grover Norquist, president of Americans for Tax Reform

Despite the battle lines, many in the antitax camp believe that most businesses will eventually come around and support a permanent moratorium on Internet taxes. "Any corporate guy that comes out for a tax increase, we're going to name the tax after him," Norquist said.

A compromise could be in the works. Under discussion is a plan that would force states and municipalities to simplify their tax rules and to promise not to apply new taxes to Internet sales and access charges. In exchange, states would receive expanded authority to collect existing sales taxes from out-of-state vendors who sell goods on the Internet. "That's the trade that state and local officials have been shopping around," said Andal, whose board oversees California's sales-tax system. "The problem is there's no [public] support for taxing sales on the Internet."

Still, there is consensus on a few issues: Members oppose placing tariffs on foreign Internet sales, and a majority favors keeping Internet access tax free, and abolishing the century-old 3 percent tax on telecommunications service enacted to finance the Spanish-American War.

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