(KPMG-PEAT-MARWICK-STUDY) American companies forecast huge growth in electronic commerce, but study uncovers concern about the impact of ambiguous state tax laws

Business Editors

NOTE: The following news release replaces BW1109, which was upheld by KPMG Peat Marwick. This revised version is for immediate release.

NEW YORK--(BUSINESS WIRE)--June 27, 1996--An overwhelming nine out of ten financial executives at American companies currently engaged in buying and selling goods or services over the Internet caution that government must clarify the associated state and local tax implications if this new method of doing business is to reach its full potential, according to a study conducted on behalf of KPMG Peat Marwick LLP.

"This study shows that electronic commerce is taking off," said Kent Johnson, National Partner-in-Charge of KPMG's Sales and Transactions Tax practice. "But it also reveals the frustrations of corporate America as it tries to cope with the murky environment created by applying old tax laws to new ways of doing business."

Johnson continues: "Taxation of electronic commerce varies from state to state so determining what's taxable and who is responsible for paying those taxes becomes very complex."

Survey respondents appear to agree. Almost seven out of ten respondents (67%) say that state and local tax laws governing electronic commerce are ambiguous, while more than half of those polled (51%) say that this ambiguity is already inhibiting their involvement in electronic commerce. Furthermore, 50% say they are "not very" or "not at all" familiar with the sales and transaction tax implications -- twice as many as those who say that they are "very" or "extremely" familiar with the tax issues. In fact, 20% of the financial executives surveyed do not know if their companies are even subject to sales and transactions taxes for the sale of products and services over the Internet.

Johnson says that these statistics are particularly distressing because several states and municipalities have already begun taxing certain Internet services.

"The huge growth potential of the Internet has undoubtedly caught the attention of state tax administrators who are eagerly looking for ways to apply existing tax laws and capture some of the revenue this business generates," said Michael H. Lippman, National Partner-in-Charge of KPMG's State and Local Tax Technical Services. "On the other hand, companies are saying that tax law, in its present form, cannot be applied to the new world of electronic commerce. They are calling for, at the least, a rewrite of the statutes and many contend that the states should give electronic commerce time to develop before imposing taxes."

Companies' concerns about taxes, however, go beyond those related to the bottom line. More than half of those surveyed (53 %) think taxing electronic commerce has the potential to become a significant threat to privacy. Other specific areas of concern include: "the crafting of equitable laws from state to state and across industries" and "fear that state taxing authorities will take a very aggressive approach in determining whether a company is taxable in its state."

Said Johnson of KPMG's Sales and Transaction Tax Practice: "Even though companies are saying they're concerned about the impact of state and local taxes on electronic commerce, very few have been proactive in working with taxing authorities to help ensure equitable rules." Nearly seven out of 10 companies (68%) say that they are "not very" or "not at all" involved with efforts to affect state and local tax policy, compared to only one in 10 companies that are "very" or "extremely involved." However, exactly half of respondents (50%) claim they do intend to become involved in industry group discussions and debates in the future.

Looking at taxation of electronic commerce from an international perspective, Jeff Stein, National Partner-in-Charge of KPMG's International Services, notes that the impact of ambiguous tax laws on electronic commerce is even more heightened as companies expand their sales and operations overseas.

"Electronic commerce has the potential to fuel the engine for future growth of U.S. exports," notes Stein. "In fact, 83 percent of study participants believe that electronic commerce will be a major vehicle for U.S. exports."

About one-third of companies believe that state and local taxes imposed on electronic commerce diminish their international competitiveness. Indeed, some companies even said that that they would consider moving their Internet activities offshore to escape state and local taxes in the future. But, KPMG cautions, such a move might not provide the anticipated tax haven because jurisdictions around the world are revenue-starved and will be just as aggressive as individual states in imposing taxes on companies engaged in electronic commerce.

"There are a great deal of unknowns when it comes to electronic versus traditional commerce. We've been advising our clients to develop a multi-level, flexible approach that positions them for sudden changes in policies. At the same time we'll continue to work with regulators to help clarify how current tax laws can be fairly applied to business in the 21st century," said Lippman.

Editor's note: The KPMG Study was executed by Clark, Martire & Bartolomeo, Inc. during June 1996. Results of the study will be available through KPMG's State and Local Tax Practice World Wide Web Site at HTTP:\WWW.US.KPMG.COM\SALT\ or by calling Patricia Neil, KPMG's director of State and Local Tax Marketing & Communications at 212/872-6570.

For the purpose of this survey, electronic commerce is defined as buying or selling products or services over the Internet. The survey was conducted among 291 companies with gross revenues in excess of $50 million. They span four industry groups: publishing; software/business services/ advertising; communications; and manufacturing/distributing/retail.

KPMG Peat Marwick LLP is the U.S. member firm of KPMG, The Global Leader among professional services firms. Worldwide, KPMG has more than 6,000 partners as well as 76,000 professionals servicing clients throughout 1,100 offices in 837 cities in 134 countries. In the U.S., KPMG partners and professionals deliver a wide range of value-added consulting, assurance and tax services in five markets: financial services; manufacturing, retailing and distribution; health care and life sciences; information, communications and entertainment; and public services.

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CONTACT: Pat Neil KPMG Peat Marwick LLP 212/872-5506 E-mail: pneil@kpmg.com or Jackie Kaldon/Constantine Theodoropulos Shandwick USA 212-420-8100, ext. 213, 217 800-223-2121 E-mail: jkaldon@shandwick.com

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