U.S. Congress to tackle Internet tax issues

Internet taxes will be on the U.S. Congress’ agenda early this year, as lawmakers grapple with how to implement a tax policy for Internet sales and access.

Debate is likely on two bills. One bill seeks to permanently ban taxes unique to the Internet.

The other aims to allow states to collect taxes on sales made via catalogs or Web sites by vendors located out of state.

The Internet Tax Non-discrimination Act, which the U.S. House passed in September, would make permanent a five-year congressional moratorium on taxes unique to the Internet, such as access or bandwidth taxes.

The moratorium expired Nov. 1, but late last year, a group of senators objected to the bill, saying its broad definition of Internet access could ban taxes on some telecommunications services, such as voice over Internet Protocol (VoIP), and possibly on future technologies not envisioned in the bill. The bill ended up stalling in the Senate before Congress went on its holiday recess in December.

A second bill, called the Streamlined Sales and Use Tax Act, would allow states to collect sales taxes from retailers selling across state lines. The bill would allow such sales tax collections after 10 states, representing at least 20 per cent of the total U.S. sales-tax-paying population, had adopted a simplified sales tax collection plan.

As of October, 21 states, including California, Texas and Ohio, had adopted the plan to adopt uniform definitions of taxable goods, according to the National Governors Association. Proponents of the plan, sometimes called the Streamlined Sales Tax Project, say it’s only fair that e-commerce companies pay the same taxes as bricks-and-mortar businesses. They argue that states are losing money that’s rightfully theirs by not being able to collect sales taxes on e-commerce, catalog and telephone sales by companies based elsewhere. In a 1992 lawsuit, the U.S. Supreme Court ruled that states cannot collect sales tax on businesses operating outside their borders because of the burden those businesses would face when trying to comply with thousands of local taxing jurisdictions.

Opponents of the plan say sales taxes could cripple e-commerce, which still only makes up about 1.5 per cent of U.S. retail sales each year. They argue that the relatively small amount of sales tax states would generate wouldn’t compare to the potential harm to Internet sales. Sponsors of the streamlined sales tax bill say they hope to have hearings in both the Senate and the House early this year.

The Internet Tax Non-discrimination Act would allow Internet sales taxes if states are also allowed to tax other remote sales, as the streamlined sales tax bill attempts to do. The “non-discrimination” bill has generated more controversy in Congress so far.

A group of former governors, including Senator Lamar Alexander, attempted in November to attach an amendment to the non-discrimination bill that would extend the current moratorium for two years while phasing out Internet access taxes in the 10 states and District of Columbia that enacted those taxes before the 1998 moratorium was passed. That group of senators opposed a permanent ban on Internet access taxes because of concerns over the definition of Internet access.

Alexander, a Tennessee Republican, and the other opponents argued that Congress should not make taxing decisions for state and local governments. Alexander cited a November study from the Congressional Budget Office (CBO) saying a permanent moratorium would cost US$80 million to US$120 million a year for those states already taxing Internet access. With the broad definition of Internet access, the ban could cost states up to US$20 billion a year from taxes on telecommunication services, as telecom companies shift parts of their networks to Internet Protocol, according to CBO estimates.

“He feels that this is potentially a big tax break for the telecommunications industry that passes along the bill to state and local governments,” said an Alexander spokeswoman.

Supporters of a permanent ban on Internet-unique taxes would encourage the growth of the Internet, encourage the adoption of broadband at low prices, and promote consumer choice for Internet service providers. The bill would not ban all taxes on the Internet, just “discriminatory” taxes, those taxes that can only apply to the Internet, supporters argue.

The permanent ban on Internet access taxes will not exempt traditional telecommunications services from taxes, just traditional Internet access, supporters say.

“If, in fact, the more than 7,000 taxing jurisdictions in this country are allowed to take a bite out of the Internet…I think that could derail the very impressive progress that we have seen in the technology sector in the last two months,” bill cosponsor Senator Ron Wyden said during debate on the bill in November. “Let us not put in place a regime of multiple and discriminatory taxes on electronic commerce if for no other reason that it would send a horrendous message to this sector.”

Wyden, an Oregon Democrat, and cosponsor Senator George Allen, a Virginia Republican, will be pushing for a vote on the bill as soon as possible, said a spokesman for Allen. But the two sides don’t seem close to a compromise.

“Throughout the recess, Senator Allen’s door was open to opponents of the legislation.” said Allen’s spokesman. “Senator Allen didn’t hear from any opponents of the bill, which clearly demonstrates they have no interest in seeing this…proposal move forward.”

Allen and other backers of the bill haven’t reached out to opponents, either, said a spokesman for Senator Thomas Carper, a Delaware Democrat and opponent of the bill. “They’re the ones saying it’s their definition of Internet access or the highway,” the spokesman said.

A ban on taxes unique to the Internet may not be necessary because states aren’t moving to tax Internet access now that the moratorium has expired, argued David Quan, director of state-federal relations for the National Governors Association.

“I haven’t heard of one state; I haven’t heard of one jurisdiction,” Quan said of the possibility of new Internet access taxes. “The biggest obstacle to passing new taxes has never been the federal government or the moratorium. It’s the voters, and those people haven’t gone away.”

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