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Bill challenges Net tax act

A new federal proposal is introduced in the Senate to ward off taxes targeted at Net access and services, and it would preempt local taxes.

A new federal proposal to ward off taxes targeted at Net access and services was introduced in the Senate today, posing a challenge to the closely watched Internet Tax Freedom Act.

The legislation, introduced by Sens. Judd Gregg (R-New Hampshire) and Joe Lieberman (D-Connecticut), would limit the creation of new Net taxes for at least three years. That part of the bill mirrors the Net Tax Freedom Act, which was submitted by Rep. Chris Cox (R-California).

But the Gregg-Lieberman Congress shapes high-tech, Net policy bill doesn't safeguard--or "grandfather"--localities' existing taxes on Net services. The grandfather clause in Cox's bill has been a sticking point in negotiations to push the bill forward by gaining the support of local and state leaders. The online industry is working to change the clause.

Earlier this month, Cox struck a compromise with the National Governors' Association (NGA) to alter his bill. Under the deal, the moratorium was reduced to three years from six, and a commission was proposed to study future taxation of e-commerce and mail order purchases. The Senate version, endorsed by President Clinton, remains intact.

The legislation introduced today also would create a commission to study inconsistencies in state and local tax laws.

Under today's proposal, 12 committee members would be appointed by the president, equally representing state governors, local officials, computer or software companies, and e-commerce ventures. The remaining members would be the secretaries of the Commerce, State, and Treasury departments.

The committee would develop model legislation to create a so-called Uniform Commercial Code for the Internet. The goal is for Net access and e-commerce transactions to be treated consistently in tax codes from state to state.

"Our approach is not to figure out how to tax these transactions, but how to promote and foster business on the Net and limit taxation on the Net," said Ed Amorosi, a spokesman for Gregg.

The U.S. Uniform Commercial Code (UCC) governs transactions from banking to rental agreements, and binds contracts between parties in different states, for example. By this summer, a new draft of the UCC that addresses e-commerce will be released.

But a uniform code for Net taxation could serve other functions. For example, it could help localities get online businesses to collect and remit sales taxes through a simple tax form. Currently there are more than 30,000 tax jurisdictions throughout the country with various collection processes.

And some localities want to collect sales taxes on e-commerce purchases made by their citizens from out-of-state Net vendors. Wide acceptance of a uniform code could make that possible, too--or prohibit it. The law requires that a business have "nexus," which is a physical presence in a state, to collect and remit sales taxes on purchases made from that territory.

Whether to support a uniform "flat tax" on e-commerce or a standard form for collecting taxes when a company doesn't have nexus in a given state was considered by state lawmakers last fall. In February, a majority of NGA members also adopted a resolution calling for a uniform tax on all sales made over the Net and through mail order purchases.

These are just some of the issues that could be studied by the commission proposed in the Gregg-Lieberman bill. In addition, the commission would examine consumer concerns about e-commerce such as fears that transactions are not secure and could lead to fraud.

"There are any number of regulatory schemes that could be developed by state and local governments to monitor Internet businesses, which could reduce administration burdens," Gregg spokesman Amorosi added.