E-commerce Tax Holiday

Dec. 21, 2004
The goal is to avoid killing growth.

State and local authorities across the U.S. won't be putting new tax bites on bits of electronic commerce for at least three years. In what the National Assn. of Manufacturers (NAM), Washington, terms a clear legislative victory for the rapidly rising number of U.S. companies that buy and sell on the Internet, the 105th Congress three weeks ago passed and President Clinton signed into law the Internet Tax Freedom Act. In addition to a three-year moratorium on new state and local taxes on e-commerce, this significant measure "expresses the sense of the Congress" that the Feds, too, should resist at least for now any temptation to tax Internet access, to tax the content of business transactions on the Internet, or to impose "multiple or discriminatory" taxes on electronic commerce. The legislation also establishes a commission to examine the issue of federal, state, local, and international taxation of e-commerce and to make policy recommendations to Congress. The U.S. time-out on new e-commerce taxes reflects a very real concern among industry executives and government policymakers alike that misguided moves could have what Dorothy Coleman, the NAM's director of tax policy, terms "a chilling effect" on the growth of e-commerce. "The Internet is a new marketing frontier with enormous potential," observes J.T. Taylor, director of congressional and public affairs at the U.S. Chamber of Commerce, Washington, D.C. "We need a very cautious approach to any proposed taxes or regulations if it is to be fully realized." Indeed, the growth of e-commerce is expected to be nothing short of phenomenal during the next few years. For example, consumers spent $2.2 billion buying goods and services on the 'Net in 1997, a level that the U.S. Commerce Dept. believes will soar to $600 billion by the year 2000, notes KPMG Peat Marwick LLP. What's more, "we've really seen business-to-business activity on the 'Net take off," says Michael Smith, San Francisco-based vice president at Mercer Management Consulting. Among the attractions: "revolutionary approaches to procurement and sourcing" that permit companies to control vendors "much more aggressively" and "manage the whole payments-transaction process very aggressively with easy-to-use Internet-based software," says Smith. In 1997, $7 billion worth of business-to-business e-commerce was transacted, with the U.S. Commerce Dept. predicting the figure will top $300 billion by the year 2002, relates the U.S. Chamber. Paul Evans, director of technology research at A. T. Kearney Inc., Rosslyn, Va., approvingly counts 15 kinds of e-commerce initiatives launched by "digital pioneers," ranging from Dell Computer Corp.'s strikingly successful selling of computers online to Heineken USA Inc.'s online forecast and replenishment information for its independent beer distributors. Indeed, Evans attributes the reluctance -- at least so far -- by the Clinton Administration and Congress to rein in e-commerce to their recognition "of the economic engine that is behind the Internet." People, he says, are "so very, very concerned not to do anything to topple this situation." Stresses the NAM's Coleman: "We need a fair and equal system that doesn't discriminate against a transaction because it's done on the Internet, or by mail, or in the store." But even the current collection of state and local tax laws may be retarding e-commerce's growth rate. More than two-thirds of the financial executives at American companies responding to a recent KPMG Peat Marwick LLP survey contend that existing state and local tax laws affecting e-commerce are ambiguous. And more than half the executives say such ambiguity inhibits their companies' involvement in e-commerce. Only a month after the panel was created by Congress, it's far too early even to speculate on what tax policies the U.S. advisory commission will ultimately recommend. Nevertheless, the commission certainly will find its task complicated by the reality that e-commerce is developing differently around the world. For example, while U.S. industry believes that business-to-consumer e-commerce offers the better returns on investment for both the short- and long-term, Europe sees the business-to-business market more promising in the shorter term. Business-to-consumer transactions will not dominate European e-commerce for five years or so, concludes a study from IBM Corp. and the Economist Intelligence Unit. Among the reason's for the lag: Europe's multiplicity of languages, high telecom costs, cultural barriers, and poor support from corporate boards. Meanwhile, half a world away in Japan, costly telecom charges are the primary constraint on e-commerce's rate of growth. Jack Gee contributed to this article from Paris.

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