Net tax freedom bill debated

Don't tax the Net--yet.

A key Senate subcommittee heard that message loud and clear today from cyber-savvy politicians and online industry groups in a hearing for the Internet Tax Freedom Act. Aside from some local officials most of the witnesses, including a representative from the Clinton administration, wanted the bill passed.

Introduced by Sen. Ron Wyden (D-Oregon) and Rep. Chris Cox (R-California) in March, the bill would bar local and state governments from imposing new taxes on online transactions until Congress sets up guidelines to do so.

The Wyden-Cox bill would give Congress the last word on applying sales and other taxes to Net commerce, even though the White House's spokesman on e-commerce, Ira Magaziner, has already pledged that no special taxes would be applied to online transactions.

As the Net's money-making potential ripens, policymakers across the country are mulling whether to tap into companies' online profits now or wait until the cash crop grows.

"When it comes to the Internet and taxation, there are no common definitions, well-understood principles or standards," said Wyden, who sits on the Senate Commerce, Science, and Transportation communications subcommittee, in his opening remarks. "Depending upon what state you're in, electronic commerce may be taxed as a telecommunications service, a computer service, an information service, or some combination, and there are different rates around the country."

"The present pattern of taxes on electronic commerce can best be described as a crazy quilt," he added.

Lawrence Summers, deputy Treasury secretary, endorsed the bill on behalf of the administration.

Support for the bill isn't unanimous. Testifying against it were Timothy Kaine, a city councilman from Richmond, Virginia, and Wade Anderson, director of tax policy for the Texas comptroller's office. They argued that Net taxation decisions should remain at the state and local levels.

"We believe that an indefinite moratorium on state and local taxes on Internet and online services would be a significant infringement on state and local sovereignty, create considerable budgetary problems for local governments, and lead to unfair competition in the marketplace," Kaine wrote in his testimony for the hearing.

Kaine also represents several organizations, including the National League of Cities and the U.S. Conference of Mayors.

But Congress has the right to step in and halt Net taxes, Internet Caucus founder Rep. Rick White (R-Washington) testified. "The Commerce Clause of the Constitution lays out the foundation for Congress to take action where commerce occurs between states or with foreign nations."

Other bipartisan state officials are backing the bill, including Republican Gov. William Weld of Massachusetts.

California, home to Silicon Valley and numerous online development companies, is wielding strong support for the antitax effort. Republican Gov. Pete Wilson, the state's tax boards, Democratic state controller Kathleen Connell, and the California Tax Payers Association have endorsed the act.

Online companies are frustrated over having to pay multiple taxes to every level of government while they try to make their businesses profitable.

"The state and local taxing authorities will tell you that the taxes they impose are fair, but they are not," testified James Walton of the Association of Online Professionals, a trade group representing Internet service providers. "Online and Internet services already pay taxes--on every phone line we use, on every dollar we make, and on the salaries we pay."

"Given time, we will become a powerful industry that will fuel the economies of our community, our state, and our country. But we can't do these things if the state is committed to our destruction," he added.

A separate bill intended to shield the Net from federal taxes is already awaiting consideration by the House Ways and Means Committee.

Introduced by Rep. Dave Weldon (R-Florida), the bill would amend the IRS code to exempt Internet access and online service fees from taxes related to federal trade. The bill would also prevent federal agencies or departments, such as the IRS, from funding studies to explore potential revenue streams related to Net taxation.

Some localities have already deemed the Net a source of tax revenue; others have moved in the opposite direction, passing legislation that gives breaks to lure online businesses.

A state bill to shield Internet service providers from additional taxes died Monday in Alabama when the state Legislature closed until next January. The bill would have exempted Internet service providers and users from state, county, and municipal sales and public utility taxes.