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Keeping the Net tax-free

The White House vows to fight e-commerce taxes, which excites many in the online industry but leaves local officials grinding their teeth.

    The White House unequivocally stated its opposition to taxing the Internet today, a stand that drew predictable praise from the online industry and angry response from cash-strapped local governments.

    Representatives of local powers say their future ability to generate revenue from the Net--something they may need for city, county, and state coffers--is being crippled because of the administration's new global electronic commerce policy.

    "The administration is concerned about possible moves by state and local tax authorities to target electronic commerce and Internet access," the policy states. "The uncertainties associated with such taxes and the inconsistencies among them could stifle the development of Internet commerce."

    Opponents fear that the administration's position will help pass the Internet Tax Freedom Act, which is already moving through Congress to halt state and local taxation of the Net.

    The e-commerce policy also calls on international governments to prohibit new taxes or tariffs on items sold on the Net.

    "What's the real program going to be?" asked Timothy Kaine, a city councilman in Richmond, Virginia, and a member of the National League of Cities. "Is the federal government going to carve off e-commerce as an area that states and localities can never tax?"

    Kaine also testified against the Internet Tax Freedom Act during a Senate hearing on the bill, which was introduced by Sen. Ron Wyden (D-Oregon) and Rep. Chris Cox (R-California) in March.

    Local officials say they aren't eager to slash and burn the e-commerce cash crop; they just want to protect their authority to do so. "We understand the need to be careful at the state and local level when imposing any taxes on the Net," said Larry Jones, assistant executive director of the U.S. Conference of Mayors. "But we don't want our hands tied so that we're unable to access this rapidly growing revenue base that enables us to provide services to our people."

    More than 300 mayors signed a resolution during the conference's national meeting in San Francisco last week stating their opposition to the Wyden-Cox legislation and any other national moratorium on state and local taxes of the Net.

    Smelling trouble, the Wyden-Cox camp is revamping the bill. The authors delayed the Senate Committee on Commerce, Science, and Transportation's mark-up of the bill last week to avoid its sudden death from the opposition's increased protest.

    "The White House policy is consistent with what we're talking about. Hopefully, it will provide some momentum for the Internet Tax Freedom Act," Wyden spokesman David Seldon said today.

    However, "we want to clarify that the bill doesn't preempt local and state taxation in terms of the normal collection of sales and property taxes," Seldon added. "The point of this bill is simply to say that state and local governments can't specifically target Internet usage or electronic commerce for new taxes."

    That position obviously has the support from industry representatives. "The direct marketing industry strongly supports the administration's go-slow approach to regulating electronic commerce," Bob Wientzen, president of the Direct Marketing Association, said in a statement.

    Local and state tax collectors may even need help collecting what's already coming to them. For example, municipalities could face similar obstacles collecting sales taxes from online sales as they do with products purchased through mail-order catalogs, according to Kaine.

    Under current law, if a California resident buys a product from a catalog company based in Virginia, the consumer must pay the sales tax in his or her home state. But Kaine and Jones claim that rarely happens.

    "In reality, catalog sales are not taxed at all because the system relies on self-reporting," Kaine contended. "Computers make it easier for vendors to collect and figure the sales tax and then send the state a check at the end of the year. But companies have resisted this."

    Locales could face an increased loss of revenue if e-commerce is treated like the catalog business. "There is no way for local governments to ensure that they are getting the taxes for the sales of [online] goods and services using the collection system for mail-order catalogs," Jones said. 

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