Internet Tax Bill Needs Changes, DMA Says

The newly revised Internet Tax Freedom Act, passed unanimously last month by the House of Representatives, still needs some work, members in the direct marketing community said last week, but most were happy with it.

The bill, H.R. 4105, introduced by Rep. Christopher Cox (R-CA), calls for a three-year moratorium on any new sales taxes imposed on Internet access and e-commerce and a commission to study how goods sold across state lines over the Internet, as well as via telephone and through the mail, should be taxed. It is a merger of two versions of the Internet Tax Freedom Act — one approved 41-0 by the commerce committee on May 14 and one by voice vote by the judiciary committee on June 17.

The Direct Marketing Association said the combined bill is improved but far from ideal as a tax moratorium proposal.

“It represents a substantially more balanced, less pro-tax collecting proposal,” said Mark Micali, the DMA's vice president of government affairs. He said agreeable modifications were adopted in the judiciary committee before reaching the House floor. “These changes added an important measure of balance to the legislation, which helped get the bill passed.”

For instance, the earlier bill proposed a commission composed of state and local officials that would review interstate sales tax collection on Internet and mail-order sales. The direct marketing industry thought that without business leaders on the commission, it would be biased and advance state and local tax interests. The new bill calls for a more balanced commission — made up of representatives of state and local interests, the business community, taxpayers and Cabinet officials. And, before it can make any recommendations to Congress on tax collection, it needs the approval of 19 of the 31 commissioners.

But the point may be moot, because Micali thinks the ultimate bill is a combination of two currently in the Senate:

* S. 442, which was introduced by Sen. Ron Wyden (D-OR) and calls for a six-year moratorium on Internet access taxes. It recently was passed by the commerce committee.

* S. 1888, which was introduced by Sen. Judd Gregg (R-NH) and Sen. Joe Lieberman (D-CT) and places a moratorium on Internet access and e-commerce taxes while creating a commission to review model state legislation to harmonize tax treatment of the Internet. A spokeswoman for Wyden said he expects the Senate to pass his bill sometime this month.

“Merging the two bills together would be the best of all worlds and would be in the best interest of the direct marketing industry,” Micali said.

For the House bill to be implemented, it must be approved by the Senate, which can choose to throw it out or fold it into the Senate bills.

Mailers have guarded optimism about H.R. 4105. Michael P. Sherman, executive vice president at Fingerhut Companies Inc., Minnetonka, MN, said it is a good start.

“I think the direct marketing industry should feel good about the fact that Congress is realizing that we really need to grapple with this one before we figure out how to make this user-friendly as a chain of commerce,” he said. “If we are not careful, we'll have everybody and his brother trying to tax you, and the customer won't be able to breathe.”

Kay Dangaard, a spokeswoman for bookseller, Seattle, is happy with the bill.

“Right now, we support the moratorium on [Internet] taxes while the Internet is still in a growing phase,” she said. Currently, charges sales tax only on orders sent within Washington state.

Most state and local leaders like the bill as well. According to Cox, the co-author of the original Internet Tax Freedom Act, which he introduced with Wyden last year, it has the support of the National Governors' Association, National Conference of Mayors, National Conference of State Legislatures, Association of Counties and National League of Cities.

“The legislation has been altered to reflect state and local concerns and now reflects a balanced compromise between the national interest in protecting this burgeoning marketplace and the importance of guarding against erosion of the state and local treasuries,” Cox said.

For example, the bill contains a grandfather clause that allows eight states that already tax Internet access to continue doing so: Connecticut, Wisconsin, Iowa, North Dakota, South Dakota, New Mexico, Tennessee and Ohio. However, Texas and South Carolina, whose governors originally collected these taxes, recently asked to be excluded from the clause to join the moratorium.

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