Lawmakers Urge Permanent Ban on New Internet Taxes

Rep. Christopher Cox, R-CA, and Sen. Ron Wyden, D-OR, authors of the 1998 Internet Tax Freedom Act, introduced legislation this week that would permanently ban Internet sales taxes.

The act, which originally placed a three-year moratorium on new, special and discriminatory taxes, also created a national 19-member advisory commission to examine how a tax system should apply to e-commerce. Led by Gov. James Gilmore, R-VA, the commission has an April deadline to issue its report to Congress.

Cox and Wyden said the new bill became necessary because of the introduction of new tax proposals that would be bureaucratic nightmares for millions of Americans.

“You can’t squeeze the new economy into policies written for smokestack industries,” Wyden said. “With [the ITFA], Chris Cox and I put a temporary stop to the reckless, special taxing of the Internet. Now, it’s time to make that ban on discrimination permanent.”

Consumers, businesses and state and local governments have thrived under the tax moratorium, the legislators said, and it was a boon to traditional retailers that had one of their best holiday seasons ever – recording a nearly 8 percent increase in sales over the previous year. In addition, state budgets ended fiscal year 1999 with a $35 billion surplus.

“Across the nation, sales tax revenues to the states are way, way up,” Cox said. “In California, sales taxes grew 12 percent in 1999, thanks to spectacular growth in the new economy.”

Current law, as interpreted by the U.S. Supreme Court, bars states and localities from requiring businesses that don’t have a physical presence within their borders to collect sales taxes on many of the goods they sell. The Internet, however, has changed the concept of physical presence, and states began threatening to ask online businesses to collect sales taxes on goods and services – even if they didn’t have a physical presence.

These issues will be discussed at the Advisory Commission on Electronic Commerce’s last meeting, March 20-21 in Dallas. Commission members are currently focusing on a proposal being circulated by members of the group who represent America Online Inc., MCI Worldcom Inc., AT&T Corp., Time Warner Inc. and Gateway Inc. that calls for a long-term extension of the current moratorium on new Internet taxes. Many commission members believe this may be one measure most everyone can agree upon and recommend.

The proposal basically states that, while on hiatus, state governments would be charged with simplifying their tax structures in exchange for enhanced power to tax interstate commerce conducted on the Web. Some members of the commission, not surprisingly, do not agree with the idea. Full details are likely to emerge this week.

“The draft does much more than [push] a simple moratorium extension,” said Stanley Sokul, a Washington-based lawyer and member of the commission, who represented the Association for Interactive Media. “It is really quite sweeping, and includes an overturning of Quill.” Sokul said he favors the moratorium extension but has problems with other elements in the package.

Meanwhile, the Web tax issue was front-and-center at a lengthy Senate Budget Committee hearing last week. During the hearing, Gov. John Engler, R-MI, testified on behalf of the National Governors’ Association and pushed for its strategy – dubbed “zero burden” – that members hope will simplify tax collection by shifting the weight from retailers to the states. Under the plan, trusted third parties would, with the aid of credit card companies, decide three things: whether goods purchased are taxable and, if so, the tax rate and total taxes due. Engler warned that barring sales and use taxes on out-of-state purchases would severely curb states’ abilities to raise revenues for schools, roads and other critical services.

Other governors, however, oppose the plan. Gov. Paul Celluci, R-MA, said that taxing online purchases would put businesses offshore to places like Bermuda that are immune from U.S. sales taxes. However, insiders said Sen. Pete Domenic, R-NM, who chairs the budget panel, sympathized with Engler.

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