California Gov. Pete Wilson today endorsed federal legislation that would temporarily halt state and local taxes on Internet transactions.
In March, Sen. Ron Wyden (D-Oregon) and Rep. Chris Cox (R-California) introduced the Internet Tax Freedom Act, which would prevent the government from imposing new taxes on electronic commerce. On Thursday, Cox will testify before the Senate Commerce Committee about the need for the bill.
California, the first state to support the legislation, could be hard hit if the Internet becomes a major tax collection target, the Republican governor said. "This bill will ensure that the Internet industry will have a chance to develop without the market distortions caused by a haphazard tax structure," he said.
Earlier this year, the California Board of Equalization, the state's tax collection agency, voted unanimously to support the legislation. So did several state taxpayer groups, including the Silicon Valley Software Alliance.
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.
While some localities have seen the Net as a source of tax revenue, others have moved in the opposite direction, passing legislation that gives breaks to lure online businesses. The Cox-Wyden legislation would take such decisions away from local governments altogether.
A state bill to shield Internet service providers from additional taxes died yesterday in Alabama when the state Legislature closed until next January.
Alabama Democrats Sen. Tom Butler and Rep. Randy Hinshaw introduced the bill in February to exempt Internet service providers and users from state, county, and municipal sales and public utility taxes.
Last fall, the Department of Revenue ruled that a four percent state utility tax for services such as electricity, water, and gas could be applied to ISPs, which would pass costs on to users.
Although the Alabama Senate swiftly passed the bill, the state House never moved toward a vote.
In other parts of the country, states have tried different Net taxation plans. The Florida Department of Revenue proposed extending its sales tax to ISPs last April, but the state Telecommunications Task Force recommended to the governor earlier this month that the Net not be taxed.
New York has declared itself a safe haven for ISPs as well. On January 11, New York Gov. George E. Pataki directed the New York Department of Taxation and Finance to follow a state report that recommends sales tax exemptions for Internet access providers.
Tacoma, Washington, also dropped its plan last fall to tax all ISPs that offer access within the city limits, including national providers. Virginia offers sweet tax incentives for high-tech and Internet companies that set up shop in the commonwealth.
Reuters contributed to this report