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House committee clears Net tax bill

The House Commerce Committee approves legislation to prohibit new taxes targeted at Net access and services for three years.

Sealing a compromise between state leaders, the online industry, and federal lawmakers, the House Commerce Committee cleared legislation today to set a three-year moratorium on new taxes targeted at Internet access and services.

Despite the committee's unanimous approval of the bill, Rep. Chris Cox's (R-California) new version of the Internet Tax Freedom Act is still drawing criticism for its split from the Senate bill, which contains a six-year moratorium on discriminatory taxes on Net access providers and e-commerce services. No versions of the bill, contend its authors, ever aimed to bar states and localities from collecting existing sales taxes on items sold over the Net.

Cox's revisions were essential in garnering the support of the National Governors' Association, the National League of Cities, and other local lawmakers. However, a so-called grandfather clause Cox drafted is still the major concern for some in the online industry.

The provision states that the moratorium will not apply to taxes on Net access or online services that were imposed by states before March 1, 1998. Opponents of the clause say it creates a loophole for localities to tax Net access under existing utility or telecommunications tax codes, for example.

Today Cox submitted a last-minute change mandating that state legislatures vote within one year to grandfather such taxes. However, forcing states to go on the record when applying Net taxes is not enough to deter the practice, said Dave McClure, executive director of the Association of Online Professionals.

"The intent of the bill was to establish that Internet access should never be taxed and to do something about the mishmash of retroactive and punitive taxes being assessed on the Internet by some states and local governments," McClure said. "We believe that the original bill, as drafted, makes the most sense for this country."

The Internet Tax Fairness Coalition, whose members include America Online, Microsoft, and CommerceNet, cautiously endorsed the House Committee's action today, although it is still leery of the grandfather clause.

"From a tax policy perspective, any grandfather clause is bad. But to get this through committee there was a need for a political compromise," Jill Lesser, deputy director of law and public policy for AOL and spokeswoman for the coalition, said today.

"Generally, tax administrators have broad authority to interpret tax definitions, and have simply been redefining old statutes [to tax the Internet]," she added. "This [version of the] bill requires the state legislature go through a deliberative process before taxing. It would allow a state to opt-out of the moratorium, but in the past year we've seen many states go through that process and decide not to tax."

President Clinton endorsed the original version of the Net Tax Freedom Act to prevent the nation's estimated 30,000 tax jurisdictions from draining the booming online industry's revenues. During the time out, legislators and the private sector are expected to decide how Net services should be taxed or when they should be exempted from levies. Also, the bill calls for the creation of a two-year "Advisory Commission on Electronic Commerce" to study e-commerce tax issues.

But local lawmakers threatened to derail the bill on grounds that it interfered with their constitutional right to raise taxes, which led to the compromise.

During his opening statements today, Cox contended that his compromise was the best step forward.

"This has been a bipartisan and [joint-house] effort from the get-go," he said. "While the compromise we reached in this bill is not yet reflected in the Senate bill, I am hopeful that we will soon be able to have a House-Senate conference and get this bill to the president, who has endorsed it in advance."

The online industry is still expected to work behind the scenes to push forward Sen. Ron Wyden's (D-Oregon) version of the Net Tax Freedom Act, which doesn't grandfather taxes, as well as the Net FAIR Act.

Introduced by Sens. Judd Gregg (R-New Hampshire) and Joe Lieberman (D-Connecticut), the Net FAIR Act doesn't safeguard localities' existing taxes on Net services and would create a committee to study Net taxation that equally represents state governors, local officials, computer and software companies, and e-commerce ventures.

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.