A Taxing Question

Dec. 21, 2004

Panel on Internet taxes far from consensus.

To tax. or not to tax. That is the Internet question. By late April a panel of experts, the year-old Advisory Commission on Electronic Commerce chaired by Virginia Gov. James S. Gilmore III, is slated to give its answer to the U.S. Congress. However, unless the commissioners find so-far-elusive consensus during the their final meeting in Dallas this week, the group's response could be a virtual disappointment. Rather than present a single, strong tax recommendation, the panel may merely list a few options for the federal lawmakers to consider. Indeed, listing two or three options -- along with their pluses and minuses -- would confirm the deep tax policy divisions that exist both within the commission and outside it. Frankly, it's difficult to find anyone who is neutral on the issue. A commission working document, for example, summarizes seven policy options but shows no areas of potential agreement. One option is to extend the 1998 Internet Tax Freedom Act for five years and prohibit all state sales taxes on business-to-consumer (B2C) transactions. Another would strip states and local governments of the power to tax e-commerce and impose a single-rate federal levy, with proceeds to be shared with states and localities. A third would require state and local governments to simplify their sales and use tax systems while meeting federal standards designed to sustain and promote "the information highway to electronic communication." A proposal from the Washington-based National Governors' Assn. (NGA) envisions "no new taxes" on Internet sales. But it sanctions a new and broad-based "trusted third parties" tax-collection system, an administrative change that raises the ire of Adam D. Thierer, an economic policy analyst at the Heritage Foundation, a conservative Washington-based think tank. Thierer claims NGA's plan "encourages the states to collude in devising a system for the extraterritorial collection of taxes on Internet sales and, eventually, all forms of retail commerce." Thierer's preference is to keep the 'Net completely free of taxes. However, if Congress opts to lift the current three-year moratorium on new Internet access levies and "multiple and discriminatory taxes," states and localities should be allowed to tax only those companies with a brick-and-mortar presence in their jurisdictions, he says. Commission chairman Gilmore, a Republican, is backing creation of a tax-free "zone" for e-commerce. But not many other members of the 19-person advisory group are likely to go along, indicates Kent Johnson, KPMG LLP's Seattle-based national partner in charge of e-tax solutions within the state and local tax services practice. "It's too fraught with problems . . . and that [proposal] actually lost ground at the last round of [commission] hearings," he says. In contrast, a level-playing-field approach -- which would tax catalog sales, Internet transactions, and other sales to consumers alike -- seems to be gaining ground within the commission. Overall commission dynamics may be changing as well. Although it's widely assumed the panel won't be able to muster the two-thirds majority necessary to endorse a single tax plan for e-commerce sales, the possibility can't be completely dismissed. "Over the last several weeks, there's been a lot of action behind the scenes," says Johnson. Some commissioners, facing the embarrassing prospect of issuing a weak report, "are looking to find some compromises," he reports. Meanwhile, business on the 'Net is booming. Business-to-consumer sales, the primary focus of the e-commerce tax debate, will reach $184.5 billion in 2004, nine times last year's $20.2 billion mark, predicts Forrester Research Inc., Cambridge, Mass. But this B2C prospect pales when compared with projected 'Net sales between businesses. These so-called B2B deals are expected to soar to a stratospheric $2.7 trillion in 2004. Much of that phenomenal growth remains to be seen within manufacturing. A survey of 2,500 companies by the National Assn. of Manufacturers, Washington, shows a surprising 68% of those responding are not utilizing the 'Net for B2B transactions. What's more, the level of sophistication among those firms now doing business online is low. While 23% of manufacturers use the 'Net to introduce new products, only 5% are employing it to strengthen links in their supply chains.

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.