Treasury Neutral On Internet Tax Federal Government Rejects Taxing Electronic Commerce

Read its lips. The Clinton administration is telling the cyber world: No new federal taxes on the Internet.

In a 46-page policy report Thursday, the Treasury Department said its guiding policy on taxing electronic commerce was neutrality.

“Neutrality rejects the imposition of new or additional taxes,” it declared.

The report goes on to discuss a range of difficult questions surrounding the rapid growth of electronic commerce, not the least of which is: If a transaction occurs in cyberspace, where does it occur for tax purposes?

Traditionally, a service is taxed at the location where it’s rendered. But, what if a consultant offers services over the Internet? Is the transaction taxed where the information is posted to a Web page, where the information is down-loaded from the Web page or where the computer serving the Web page is located? And how can authorities track such transactions?

Another issue concerns whether a tangible product, such as a book or photograph or musical recording, is converted into an intangible product when it is digitized and transmitted over the Internet. How should the transaction be taxed?

The answers have interstate and international ramifications.

The Treasury Department, according to Glen A. Kohl, deputy assistant secretary for tax policy, is seeking to open a discussion on the topic, rather than issue policy pronouncements. Above all, it seeks to make sure government policy doesn’t impede growth in the rapidly developing field.

“We think electronic commerce is to be encouraged and we want to make sure the tax system doesn’t get in the way,” he said. “We don’t think electronic commerce justifies new taxes.”

In the pre-Internet world, two principles have covered assessment of income taxes: the location of the source of the income and the residence of the person receiving the income. If an Australian offers services to U.S. customers from a computer in Canada, what’s the location of the source of the income?

Kohl said Treasury’s goal is to develop rules and international agreements that prevent double taxation and provide certainty.

The Treasury report does not address the applicability of state taxes to the Internet. Several states, including Massachusetts and Florida, have examined applying taxes designed for telephone service to Internet service.