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Moratorium on Internet Taxes Wins Local Groups' Approval

Governors appeased with legislation that requires study of taxes on out-of-state sales

By Juliana Gruenwald, CQ Staff Writer

Prospects for a moratorium on new Internet taxes have improved after state and local officials, who had fiercely resisted such a waiting period, embraced compromise legislation.

Leaders of the National Governors Association, National League of Cities and other local government groups announced their support March 19 for a compromise version of a bill (HR1054) negotiated with chief sponsor Rep. Christopher Cox, R-Calif. It would impose a three-year moratorium on new taxes on Internet access, services or commerce while a commission tries to find a fair tax method.

Cox said he hopes the bill, which has been approved by two House subcommittees, will be considered on the House floor before Congress takes its spring break.

State and local officials dropped their opposition to a moratorium on new Internet taxes, including levies on Internet access or on the number of bits of information being transmitted over the Internet.

While insisting for months that the legislation would infringe on the tax authority of state and local jurisdictions, the governors said in February that they would agree to prohibit unfair taxation against the Internet if Congress passed legislation resolving the out-of-state sales tax issue.

A key component of the compromise would address a longstanding concern by state and local officials over their inability to force companies to collect taxes on some out-of-state sales, including mail orders.

A company now doing business by mail order or through the Internet does not have to collect sales taxes from an out-of-state customer unless that company has a physical presence in the customer's state.

State and local officials say that as Internet commerce grows, the amount of tax revenue lost through the loophole will be enormous. Sales taxes make up nearly 50 percent of state revenues.

The compromise proposal announced by Cox and the governors would establish a commission, made up of federal, state and local officials and industry representatives, to study Internet taxation and to develop recommendations for legislation on the sales tax issue. Such legislation would propose a system for taxing out-of-state sales and provide for an expedited review of such a measure by Congress.

Most governors "believe we shouldn't inhibit the Internet's growth," said Gov. Michael O. Leavitt, R-Utah, who has been leading negotiations on the issue with Cox.

But Leavitt also said the "marketplace of the future requires a 21st century system of commerce that is more uniform, consistent and streamlined."

Cox said that while he backs the compromise, he is not prepared to endorse any future legislation aimed at taxing out-of-state sales.

Issue of Existing Taxes

Not everyone involved with the issue is hailing the breakthrough.

The proposal changes the length of the moratorium in the current version of HR1054 from six years to three and allows those states that have imposed and enforced Internet access taxes to continue doing so. That aspect is still in negotiation, according to an aide to Cox, who said his boss is wary of the impact of the provision.

Ron Wyden, D-Ore., the sponsor of a Senate version of the Internet tax legislation (S442), has said the protection for existing taxes is one reason he does not favor the compromise, according to spokesman David E. Seldin. Wyden also does not believe the legislation is the appropriate vehicle for addressing the out-of-state sales tax issue, Seldin said.

Internet industry representatives raised similar questions.

Jill Lesser, a lobbyist for America Online and a spokeswoman for the Internet Tax Fairness Coalition, said her biggest concern is that the bill "rewards states that rushed to tax ratherthan those that hung back."

Lesser and others also said the proposed Internet tax commission would be too heavily weighted toward government -- it would include 16 federal, state and local government officials and 12 industry representatives.

The Direct Marketing Association, which represents companies that sell merchandise through mail and over the Internet, also voiced strong opposition.

"I think it is strongly leading or suggesting that the commission come down on the side of forcing collection of sales taxes in states where marketers have no physical presence," said Mark Micali, vice president of government affairs for the direct marketers.

Senate Commerce Committee Chairman John McCain, R-Ariz., is negotiating his own compromise with the governors. A committee spokesman would not say what concerns McCain has with the Cox compromise.

McCain's committee approved Wyden's bill in November. But since then, Senate Majority Trent Lott, R-Miss., has said he does not want to move the legislation until the problems raised by state and local officials are addressed.

© 1998 Congressional Quarterly Inc. All rights reserved.
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