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A task force of Interactive Services Association (ISA) member companies recently issued an executive summary of a white paper on state and local Internet and online taxation. The document recommends that policymakers take time to consider the unique nature of the emerging industry before imposing taxes that would be difficult to implement and collect.

The white paper, entitled "Logging On to Cyberspace Tax Policy," was commissioned last summer by the ISA, a trade association serving the Internet and online industry, to provide information to government policymakers about the issues related to taxes on Internet and online services. The ISA task force is preparing the white paper with assistance provided by Ernst & Young LLP. The ISA task force members include America Online, Inc., AT&T, CompuServe Incorporated, GE Information Services, Inc., IBM, Microsoft, Corporation and NETCOM On-Line Communication Services.

The ISA task force recommends that if states impose taxes on Internet and online services, they should be--

* based on a set of uniform definitions adopted by all the states;

* based on uniform rates adopted within states;

* imposed on the purchaser, with
respect to a specific transaction; and

* attributed, in the absence of better information about the location of the purchaser, to the state to which the sales are billed.

"If the states move too quickly, they will risk creating, rather than resolving, major problems," cautions the executive summary. "Since relatively small amounts of tax are currently at stake, there is time in which to work together to develop a fair and efficient tax system....A deliberate and cooperative approach will avoid the dangers that lurk in precipitate and uninformed action on the part of the states, dangers that could hinder the development of the

The executive summary points out that, while the industry is experiencing rapid growth, it is still relatively young. According to estimates from industry research firms, revenues from Internet access and consumer online services totaled $1.6-$2.2 billion in 1995, which was less than 0.8 percent of total communication services spending (including telephone, television and radio broadcasting, cable and pay television services), as defined by the Census Bureau. In addition, sales of tangible property over online services and the Internet were estimated at only about $500 million last year, which was less than 0.4 percent of total consumer mail order sales.

The executive summary expresses the task force members' willingness to work closely with policymakers to help them understand the industry and to try to resolve the issues raised by taxing these types of services and transactions. Among the issues identified by the task force were--

* the difficulty of determining the physical location of a seller operating through the Internet;

* the difficulty of determining the location of a buyer of a product that is transmitted electronically;

* the need to recognize that Internet and online services are not telecommunications services; instead Internet service providers and online services are the purchasers of telecommunications services as are their individual customers;

* the application of different tax systems from state to state;

* different tax rates imposed by different jurisdictions within a state; and

* the application of traditional nexus standards, which determine whether a state has taxing jurisdiction over a party.

After reviewing the issues, the task force concluded that the only type of tax that could be applied effectively to Internet and online transactions would be a "transaction tax" that is imposed on the purchaser, not the industry. Such transaction taxes might be applied to subscriber fees and to services and products sold and/or delivered over the Internet.

"There are many states that are taking a deliberative approach to examining these issues," said Bruce Reid, chairman of the ISA's Online State Tax Committee and director of excise and property taxes for Microsoft. "However, many states have already demonstrated that they are prepared to tax Internet and online services. While no one welcomes the prospect of additional taxes, we want to ensure that if they are imposed, that they don't impede the growth of the industry."

For more than a year, the ISA and its member companies have been working with state and local governments on tax issues affecting the industry. Last November, the ISA testified on the issue before the Multistate Tax Commission. Early this year, it participated in a debate over a proposed Florida tax on the industry. Two of the ISA task force members currently serve on the Florida Telecommunications Taxation Task Force, which is addressing issues similar to the ones the ISA task force has been reviewing.

In addition to Florida, states that have publicly considered new taxes on Internet and online services include Connecticut, Massachusetts, Nebraska, Tennessee, New York, and Texas. On top of that, cities in Washington and California have also eyed taxes on Internet and online services.

The full text of the white paper would be available at this time. "We recognized that a number of state officials have been waiting for the release of the white paper before proceeding with their own review of possible taxes," said Reid. "We wanted to get the Executive Summary
into their hands now so that it can
help inform their thinking as they go

Because the issues surrounding taxation of Internet and online services are so complex, he said, "it has taken the task force longer than originally anticipated to review the issues and complete the white paper." In light of the widespread interest in the white paper, he added, "we wanted to make sure that when the white paper is issued, it will be a comprehensive and therefore useful resource for policymakers."

The full text of the Executive Summary of "Logging On to Cyberspace Tax
Policy" is available through the ISA's
site on the World Wide Web (http:// www.isa.net). Copies are also available by calling the ISA offices at (301) 495-4955. *


By Neil Becourtney, CPA,
J.H. Cohn LLP

The New York State Department of Taxation & Finance has issued Form DTF-383, Income Tax Installment Payment Agreement Request for 1996, to make it easier for an individual that cannot pay his or her entire 1996 New York personal tax liability to arrange for an installment payment plan. This form is similar to IRS Form 9465, Installment Agreement Request, that has been in use for several years, however there are a number of differences.

There is no stated ceiling as far as how much 1996 New York tax a taxpayer may owe before becoming ineligible to request a payment plan by filing Form DTF-383. Payment plan requests exceeding 24 months, however, cannot
be arranged by the filing of this form.

Form DTF-383 asks for a stated reason for requesting a payment agreement whereas IRS Form 9465 does not. NYS requires that the first month's payment be remitted along with the form prior to a payment plan being approved, while the IRS does not require a payment prior to granting a payment plan. Form DTF-383 has entries for monthly salary and major expenses similar to IRS Form 433-A. Another difference is that all New York installment payment plans will have a due date of the 15th of each month as compared with IRS payment plans that allow the taxpayer to select the monthly
payment date no later than the 28th
of the month.

While the Form DTF-383 should make it easier for some taxpayers who cannot pay their entire 1996 New York tax liability to obtain installment payment plans, the form is more involved than its Federal counterpart, Form 9465, and would appear to attract greater scrutiny from the New York State Department of Finance. At least New York State is not charging a $43 fee for approved payment plans as the IRS does. *

State and Local Editor:
Marshall L. Fineman, CPA
David Berdon & Co. LLP

Interstate Editor:
Stuart A. Rosenblatt, CPA
Wiss & Company LLP

Contributing Editors:
Henry Goldwasser, CPA
M. R. Weiser & Co. LLP

Leonard DiMeglio, CPA
Coopers & Lybrand L.L.P.

Steven M. Kaplan, CPA
Konigsberg Wolf & Co., PC

John J. Fielding, CPA
Price Waterhouse LLP

Warren Weinstock, CPA
Paneth Haber & Zimmerman LLP

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