November 21, 1996 6:00 PM PST

Equality for e-commerce

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The Treasury Department issued a report today that opposed any additional taxes on Net-based transactions but recommended that the government look for businesses hiding income made on the Net.

The report's states that income generated from online transactions should be treated the same as any other kind of income and be taxed at exactly the same rate.

"What we're talking about is not creating any new taxes but simply adapting to the growth of these technologies," said a Treasury spokesman. "The whole idea is to try and view the emerging technology in a way analogous to existing tax law."

Added a Treasury official who helped draft the report: "There should be no special tax on Internet commerce, no new taxes applicable to the Internet."

The 50-page document reflects a preliminary Clinton administration review of issues concerning electronic commerce. Its purpose is not to recommend any actual policy changes but to attract response from industry and business leaders and to set a tone for future discussions of e-commerce and taxes.

The report follows a September Treasury Department conference on electronic money, where top officials of the nation's financial agencies outlined their views. A White House official said the administration was "very supportive" of Treasury's Net taxation report.

"It represents well the market-oriented, nonregulatory approach that we have been advocating in an interagency working group on electronic commerce," the official said. The Clinton administration has made noises that it wants to encourage future growth of Internet commerce. Today's report may be another step toward a real e-commerce fiscal policy.

With the exponential growth of the Net in the past few years, local and state governments have been scrutinizing Net companies as possible sources of additional tax revenue, above and beyond the income and sales taxes that all companies pay.

Several local governments have specifically proposed levying surcharge fees on Net access from local Internet service providers, proposals that have been attacked by ISPs and Netizens across the country. E-commerce, where virtual money passes hands on the Net, are also a potential target of additional taxes, but opponents say such laws would restrict the future growth of electronic storefronts.

The Treasury report called for rules to prevent double taxation of international transactions. Because the Internet effectively erases national borders, cross-border transactions may face "quixotic taxation" if nations claim inconsistent taxing jurisdictions, according to the report. The report also warned that identifying which nation will have jurisdiction to tax Internet sales will be a sticky question.

Since some businesses may take advantage of this to hide taxable income, the report recommended that the government step in to clarify the jurisdictional questions. It recommended that the government examine how to use encryption and other technologies to verify who is involved in electronic transactions and thus who is subject to legitimate taxes.

While the report opposed the creation of new taxes on electronic transactions, it did suggest that taxes based on royalties or online sales of goods and services be redefined because digital content--software, manuscripts, music, or images--can be transmitted and reproduced so quickly.

The report did not, however, address state or local taxes on electronic transactions or taxes on Internet service providers and online services.

"We're very pleased the administration takes this position in recognition of the detrimental effects that tariffs and taxes would have," said David McClure, executive director of the Association of Online Professionals, a trade group for ISPs. "It is unfortunate that the federal government does not have a similar policy with regard to state and local taxation."

Added Sara Fitzgerald, a spokeswoman for the Interactive Services Association, another trade group for online providers: "If it says the federal government should stay out of taxing the Internet, we would endorse that point of view."

Bruce Reid, a Microsoft attorney who has worked against state and local taxation of ISPs, praised the Treasury's go-slow effort.

"The approach seems to be right if, for the time being, they are taking a deliberative, measured look at this," said Reid, who chairs the ISA online state tax committee. "They're taking it in baby steps rather than jumping on it with some policy that may or may not end up being good for the industry."

 

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