Internet-Tax Issues Divide Lawmakers

Washington-The battle over Internet taxation is raging on Capitol Hill, giving cyberspace a front seat in Congress this year, just in time for the November elections.

With a three-year moratorium on Internet taxation ending next year, lawmakers are squaring off over the future of tax policies that affect electronic-commerce transactions and Internet-access fees.

One of the fastest-growing business sectors in the country, e-commerce is poised to grow exponentially with high-speed broadband Internet services in place. Some party officials, including House Speaker J. Dennis Hastert (R-Ill.), view the tax question as a clear-cut election-year issue.

"The question voters must ask themselves in this election year is simple: Which party is better able to promote a successful transition to the new economy?" Hastert said in a recent speech.

But other lawmakers, such as Sen. John McCain (R-Ariz.), suggested that the complexities of the issue-from the move to ban all new taxes on the Internet to concerns over lost state-sales-tax revenues associated with that ban-require that lawmakers spend more time understanding the problem.

The moratorium, passed by Congress in 1998, was intended to spur growth in the budding Internet economy by prohibiting all new multiple and discriminatory Internet taxation.

Under the Internet Tax Freedom Act-sponsored by Sen. Ron Wyden (D-Ore.) and Rep. Christopher Cox (R-Calif.)-federal, state and local tax jurisdictions may not collect taxes aimed solely at the Internet. State governments would still be permitted to collect sales taxes on e-commerce transactions through existing use taxes, which require consumers to pay state sales taxes for all goods purchased online or from catalogs.

While a tax moratorium does not expressly outlaw the collection of existing sales taxes for goods sold online, use taxes typically deliver limited revenue, and they are difficult to enforce.

"It is impossible to collect the use tax on a broad basis," Sen. Byron Dorgan (D-N.D.) said in a recent Senate Commerce Committee hearing.


In a development that could change the nation's sales-tax systems significantly, Cox and Wyden would like to see that moratorium made permanent. Earlier this year, the pair introduced the Internet Nondiscrimination Act, which formally extends the current moratorium in perpetuity.

"We cannot apply tax policies developed for smokestack industries to the new economy," Cox said in a recent hearing in the House Commerce Committee.

But some warned that the tax ban would jeopardize state revenues needed to fund essential public services, including police and fire departments. "While we're all spending our days buying books online ... who is going to pick up the trash?" Rep. Ed Markey (D-Mass.) asked in a March speech. "How will we pay for essential government services? We ought not rush to make a tax prohibition permanent."

Several governors, including Mike Leavitt (R-Utah) and Christine Todd Whitman (R-N.J.), have expressed concerns over lost revenue due to a rise in nontaxable e-commerce. But other lawmakers insisted that the tax ban is helping state revenues.

"Some claim that tax revenues will erode unless states and localities have the ability to tax online retailers," Rep. Tom Bliley (R-Va.) said. "All evidence points in the opposite direction." E-commerce transactions comprised only 1 percent of sales totals last year, Cox said, and state-sales-tax revenues were on the rise.

"Across the nation, sales-tax revenues to the states are way, way up," Cox added. "In California, sales taxes grew 12 percent in 1999, thanks to spectacular growth in the new economy. The evidence is in: Keeping discriminatory taxes off the Net is good for consumers, entrepreneurs and the governments that tax them."

But Leavitt, who said he does not support multiple and discriminatory taxes on the Internet, added that new tax policies should not be based on revenue figures calculated during an economic boom.

Calling for a streamlined sales- and use-tax system, Leavitt outlined a plan currently being developed that would register all e-commerce transactions with a centralized authority that takes into account what sales-tax revenues should be levied.

Cox suggested that the centralized system would be discriminatory because it would specifically target online transactions. Rather than supporting a new centralized system of sales-tax collection, Cox said, states should seek stronger enforcement of the use tax. He added that recent court decisions preventing states from aggressive use-tax collection should be opposed.

Retailers agreed with both Leavitt and Cox, urging Congress to create a uniform sales tax throughout the country before moving to continue the moratorium.

"We believe that existing sales and use taxes should be collected uniformly on all types of retail sales," the International Council of Shopping Centers said in a statement.

Saying that he questioned whether creating a central sales-tax authority was "workable," Wyden offered to include Leavitt and the National Governors Association in the debate over Internet taxation if they accepted an extension of the moratorium.

While Markey said he was wary of a permanent tax ban, he added that he would consider voting for a temporary moratorium extension if it takes into account needed changes in sales-tax systems.


McCain, who introduced a bill that would extend the ban for another five years, said more time was needed to resolve questions over whether the Internet should be taxed.

"I do not see how we can arrive at consensus on these critical issues between now and October of next year, which is why I have proposed a five-year simple extension of the current moratorium," McCain said.

The McCain bill-placed on the committee calendar for a markup this spring-crafted the tax ban after an advisory commission voted to extend the moratorium another five years following its final meeting March 21 in Dallas.

The 19-member commission, headed by Gov. Jim Gilmore (R-Va.), was authorized by the 1998 Tax Freedom Act to study the impact of Internet taxation on industries and state revenues. Gilmore, who favors a permanent ban on Internet taxes, said the burden rested on state governments to prove that taxes are needed.

"Government must prove a tax is absolutely necessary for the provision of essential services before taxing a new realm of economic activity or human endeavor," Gilmore said in testimony before the House Commerce Committee. "Government has no right to expand tax burdens on Americans just because a similar commercial transaction is taxed."

The commission voted 11-1, with seven members abstaining, to extend the moratorium through 2006. They also voted to ban online access fees permanently. But most of the commission findings drew fire from lawmakers and industry officials because they failed to achieve a required two-thirds majority.

"I regret that a great many of us in Congress will be obliged to treat the bulk of the commission's report as though it were never presented, given the law's clear direction in this matter," Rep. John Dingell (D-Mich.) said. The tax-ban extension "is clearly at odds with the statute, and it is understandably the source of strong criticism from within the ranks of the commission itself."

Other lawmakers, including Rep. Anna Eshoo (D-Calif.), said the commission's findings were flawed because they failed to account for the minority viewpoint.

Bliley criticized the objections to commission findings. "This pro-tax faction is now hiding behind alleged process concerns as a reason to abstain from voting on proposals that keep the taxman out of cyberspace," Bliley said. "If that's political leadership, then I invented the Internet."

But traditional retailers also argued that the report was invalid. "This report is dead on arrival," said Lisa Cowell, executive director of The e-Fairness Coalition, a retail advocacy group. "It fails to meet even the basic requirements set by Congress, and it should be consigned to the trash bin. Congress should reject this report and support tax policies free of tax breaks and preferential treatment for online retailers."

Some lawmakers vowed to block the moratorium extension until provisions could be made accounting for state revenues.

Sen. George Voinovich (R-Ohio), a former governor of Ohio, said he would make sure that "the majority opinion isn't greased through the United States Congress."