The Clinton administration yesterday criticized as "troubling" a plan to exempt online purchases from sales taxes that has been proposed by Virginia Gov. James S. Gilmore III (R), the chairman of a congressionally appointed panel that is trying to determine tax policies for Internet commerce.

The administration argued that Gilmore's plan would provide an unfair advantage to online merchants and deprive states and local governments of needed tax revenue.

"This violates the fundamental principle of tax neutrality and raises troubling questions about its implications," said a senior administration official, who requested anonymity. "Would such an approach lead to the effective abolition of state and local sales taxes, undermining their ability to provide basic services?"

Although online and catalogue merchants are not legally obligated to collect sales taxes if they ship a product out of state and have no operations in the destination state, consumers are supposed to pay "use taxes"--equivalent to their local sales tax--to their state treasury. Few actually do that, making most online and catalogue purchases effectively tax free.

Gilmore contends that the lack of aggressive tax collection on e-commerce has fueled online shopping and in turn the country's economic boom. "We don't want to kill the golden goose," he said yesterday.

He also argued that states and local governments have not seen any noticeable drop-off in tax revenue from electronic commerce, and that crowded shopping malls are evidence that bricks-and-mortar merchants are not withering.

Gilmore's plan will be debated next week when the Advisory Commission on Electronic Commerce meets in San Francisco. The panel is trying to develop an Internet tax policy to recommend to Congress next year.

The group also will consider a rival proposal offered by the National Governors' Association, which worries that tax-free online shopping will put Main Street merchants at a disadvantage and deprive localities of much-needed revenue. Under the governors' plan, existing sales taxes would be applied to electronic commerce but participation by merchants would be voluntary. The states would arrange for third-party clearinghouses, compensated by a fraction of the tax revenue, to help merchants collect the taxes and distribute payments to the states.

The administration official reacted favorably to the governors' plan, saying it "should be carefully considered by the commission."