The irresistible force of the Internet economy met the normally immovable US Congress head on this week as the US Advisory Commission on Electronic Commerce yesterday submitted controversial report on Internet taxes. The early indications are that E-commerce was the winner and the current moratorium on new internet taxes will be extended for another 5 years.
"In the Internet economy, it is unfair to make small mom-and-pop businesses collect taxes on the Internet", ACEC Chairman and Virginia Governor James Gilmore said after presenting the report. "Under the current arcane system of sales taxes, the business initiative that founded our nation would wither in a blizzard of paperwork and bureaucracy. Let it be known that the Commission has weighed in heavily on the side of low tax burdens, fairness, and equal opportunity for all Americans."
As expected, the Report recommends that the current Internet tax moratorium be extended for another three to five years while State and Federal authorities examine ways of making the US sales tax system clearer and simpler to administer in relation to e-commerce.
Republican legislators in Washington have been quick to rally behind this recommendation and Congress and the Senate currently have three different bills on their agenda which would extend the current internet tax ban by up to 5 years.
At this stage it appears that the Republicans have the numbers in Congress, particularly now that Republican House Speaker Dennis Hastert has given his full support to extending the ban. Getting the numbers in the Senate, however, could be a more difficult proposition, as State Governor's and main street retailers intensify their lobbying efforts against accepting the ACEC's recommendations. Already this week Senator John McCain has delayed the introduction of his Senate bill, bowing to pressure from Senators asking for more time to consider the ramifications of extending the internet ban.
Although the Governors and retailers are presenting a united front at this stage, one of the keys to the success of this pro-internet tax marriage of convenience will be their ability to maintain unity when Congress and the Senate debate the matter. For State Governor's internet tax is simply a matter of States' rights whereas for retailers their opposition to the ACEC findings is based on concerns about special treatment being given to on-line 'e-tailers' resulting in an uneven playing field in the retail market, and there is clearly plenty of room for the two groups to splinter when it comes down to the details of internet taxes.
Despite the protestations of the Governors, more than two thirds of whom signed a letter to Congress this week denouncing the ACEC's findings as a threat to their revenue base, their claims do not stand up to scrutiny when the numbers are revealed. A debate by leading political and academic experts held Harvard University last week concluded that because e-commerce currently only represents 1 percent of US retail sales there is still plenty of time to address the issue of internet taxes before State and local budgets are adversely affected.
As for the retailers, their demands for a level playing field for both on-line and off-line retailers are reasonable when considered in isolation, but do not take account of the current state of the internet economy. With all but a few e-commerce companies yet to realise a profit, it is only reasonable that they should be cut some slack for a few more years until this emerging sector of the economy matures and stabilizes.
The bottom line is that there is no consensus position available on internet taxes that would please everyone and the US needs to urgently simplify its sales tax system for more reasons than just e-commerce, and this fact is recognised in ACEC Report which ties extending the internet tax ban to reform measures such as clarifying the nexus issue and working towards a "uniform sales and use tax" system.
But apart from the obvious need to buy time for a sales tax housekeeping exercise in the US, the most significant reason why the US should extend its internet tax ban is that this will allow time for the debate to shift from a local and national level to a global level, and it is the ACEC's recommendations on this matter that are likely to have the greatest impact in the long term.
Section III of the ACEC Report makes a number of sensible recommendations with regard to "International Tax Issues and Tariffs" which would ensure that the US Congress focuses its attentions on addressing global e-commerce regulation through the international forums already established by the WTO and OECD, including:
Supporting the permanent
extension of the WTO's current moratorium on tariffs and duties
for electronic transmissions
Affirming support for the principles of the OECD's framework conditions
for taxation of e-commerce, in particular the non-discriminatory
and neutral taxation of e-commerce.
Encouraging all nations to defer modification of their tax systems
in order for the development of an international consensus on
e-commerce taxation.
These recommendations alone should be reason enough to warrant
the US extending its current ban on new internet taxes. But US
politics is complex to say the least when it comes to organisations
such as the WTO and OECD and there are many issues and agendas
unrelated to e-commerce tax that could influence Congress to take
a non-co-operative stance on dealing with internet tax in these
forums, and the international question is unlikely to be looked
at until the current domestic debate runs its course.
However, lurking in the wings on the international front is the European Union, which is already implementing plans to extend its VAT system to include e-commerce ahead of the WTO, OECD and the US. With US retailers and e-tailers both keen to establish a strong presence in Europe via the internet, the EU's pre-emptive internet tax grab could be a key factor in whether these international forums can bring the US to the table for serious discussions about global e-commerce regulation and taxation at an early stage. But as the recent negotiations between the EU and the US on data protection rules has demonstrated, this could be a long and hard process.
ACEC REPORT
Advisory Commission on Electronic Commerce - Report
to Congress (PDF)
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