Senator: Internet tax ban will pass

Lingering concerns over a ban on Internet-unique taxes shouldn’t stop the legislation from being passed in the U.S. Congress, a senator said Friday at an Internet taxation forum.

Senator Ron Wyden, a sponsor of the Internet Tax Nondiscrimination Act, pledged to work with those in state governments who fear the legislation, as passed in the House, would bar states from collecting taxes on telecommunications services offered over the Internet, such as voice over IP (Internet Protocol). State and local governments could lose close to US$9 billion a year by 2006 if the House bill’s language is interpreted by courts to exempt telecommunications carriers from paying taxes on all services offered through Internet technology, the Multistate Tax Commission, representing tax officials from 45 states, said Wednesday. [See, “States protest congressional Internet tax ban,” Sept. 24.]

The proposed legislation needs to be clear enough to exempt DSL (digital subscriber line) access from taxes, which two states have defined as a taxable telecommunications service, said Wyden, an Oregon Democrat. But the bill does not intend to do away with all telecommunications taxes, he added. The bill is intended to permanently bar state and local governments from collecting Internet access taxes and bit taxes as a piece of information is routed on the Internet through multiple taxing jurisdictions.

“What we have been trying to do through all these discussions is to make sure the states are really sure on this point,” Wyden said at the sponsored by the National Journal Group. “But we are not trying to go over the line and get into the telecommunications area, which has not had this protection.”

During the forum, panelists debated the Wyden bill and an effort to streamline state sales tax laws across the U.S. so that states could begin to collect sales tax from out-of-state retailers such as e-commerce sites and catalogs.

Other members of the Internet taxation panel said they support the Wyden bill’s intent, but are concerned that as telecommunications and Internet services become more blurred, the bill would create confusion about what services should be taxed. Voice over IP and land line-based telecommunication should be taxed the same, so that small providers of voice over IP service don’t have an advantage over telecommunications carriers, said Mark Mullet, vice president of federal government relations at Verizon Communications Inc.

“If normal voice communications … were fully taxed under the normal telecom service regime, while voice over the Internet were tax free, that could be a 20 or 30 percent differential and huge competitive disadvantage for the normal phone company,” Mullet said.

Congress may have to revisit the Internet tax ban law frequently as new technologies emerge and voice services are packaged with Internet services, said Neal Osten, senior director of the Committee on Communications and Interstate Commerce for the National Conference of State Legislatures. “This technology is going to continue to change,” Osten said. “It’s not constant.”

Congress has approved two moratoriums on “multiple and discriminatory taxes” on electronic commerce since 1998, but the current moratorium expires Nov. 1. Supporters of a permanent ban on Internet-only taxes say it’s necessary to promote the growth of e-commerce and protect the Internet from the confusion that would result if the more than 7,000 taxing jurisdictions in the U.S. tried to levy taxes. The Senate has yet to vote on its version of the Internet-tax moratorium bill.

While most of the panelists agreed about limiting taxes on the Internet, the streamlined sales tax proposal generated debate. Twenty states have adopted a uniform sales tax proposal intended to allow states to impose sales taxes across state lines. In a 1992 court case, the U.S. Supreme Court ruled that North Dakota’s effort to tax an out-of-state retailer was unconstitutional because the myriad of state sales tax laws made interstate commerce burdensome.

On Thursday, Representative Ernest Istook Jr., an Oklahoma Republican, introduced a bill allowing states that sign on to the Streamlined Sales Tax system to collect sales and use taxes from out-of-state retailers. But James Gilmore, a former Republican governor of Virginia, questioned how the system would work if a handful of states adopt it and most states do not.

Gilmore suggested states shouldn’t be trying to create more taxes, instead, they should be trying to lower taxes for their residents. “The real nut of the question is, what is the right policy for the people, or the country?” he added.

E-commerce is a small percentage of all retail sales in the U.S. and consumers should get a break and be able to buy some products “without having to pay taxes all the time,” Gilmore said. “This whole debate has taken on a religious fervor, frankly. The people who want to tax the Internet, man, they really want to tax the Internet. All facts to the contrary, this is really important, and they’re going to do it, come hell or high water, if they possibly can.”

Supporters have argued the issue is about fairness and treating in-state and out-of-state retailers the same. The streamlined sales tax law would give retailers certainty over which products are taxed across the U.S., said Maureen Riehl, vice president and state and industry relations counsel for the National Retail Federation. “We don’t tax policy determining whether you have winners and losers,” Riehl said.

But Gilmore rejected the argument of a level playing field as bogus, saying bricks-and-mortar retailers have to charge a sales tax, but they have several other advantages over remote retailers, including easy returns and buyers being able to touch the merchandise. On the other hand, people who buy from remote retailers may not now have to pay sales taxes, but they have to pay shipping charges, Gilmore said. “So now you’re going to pay a tax under the new regime and a shipping charge,” he added. “People can choose to do that if they don’t want to pay a tax. But that’s a choice.” Inc. supports a uniform sales tax proposal and is working with states to craft a law to simplify their tax laws, said Paul Misener, vice president for global public policy at the company. “We find that the burden of collection is very real,” he said. “If and when the sales tax regime in this country is truly simplified, we’d be fine to collect.”

But Tod Cohen, associate general counsel for global public policy at eBay Inc., said he’s concerned that some high-volume sellers on eBay would end up having to collect sales taxes if they go beyond a $5 million limit on yearly sales before the sales tax collection requirement kicks in. When Misener suggested eBay could create software to help those sellers collect the taxes, Cohen agreed, but he said such collections would still create difficulties for eBay sellers.

About 150,000 people in the U.S. make their livings selling on eBay, Cohen said. “Of those, a remarkable number are rural, poor, older people in states where they didn’t have access to a worldwide marketplace until eBay came along,” he said. “It comes to this question of, are our sellers going to get discriminated against and run into artificial barriers … versus the current system, which we think is fair.”