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Tech Industry

Net tax measure may pave way for fees

The leading legislation for Internet taxes would provide a method for states and towns to collect sales taxes but would leave open the possibility of Internet access fees.

    WASHINGTON--The leading bill being considered by Congress to sort out the mess of collecting sales taxes online creates the possibility of future fees on Internet access.

    This is one of the most significant differences between the bill introduced last week by Sen. Byron Dorgan, D-N.D., and a similar one introduced earlier this year by Sen. Ron Wyden, D-Ore. Wyden's bill has only gained the support of Sen. Patrick Leahy, D-Vt.; Dorgan's bill had 10 Republican and Democratic co-sponsors on its first day.

    There have been very few government attempts to tax Internet access, but it has emerged as one of the greatest fears of online users. For some time now a multitude of people have been forwarding to friends a fraudulent e-mail about a nonexistent bill that would impose per-minute fees on Web surfers.

    Though the e-mail was not real, cities and towns that imposed such fees before 1998 may continue to impose them as they were grandfathered under the Internet tax moratorium imposed that year. That moratorium expires in October.

    "The current expiration date for the moratorium on Internet access and discriminatory taxes is fast approaching," Dorgan said. "The moratorium should be extended."

    Dorgan's bill extends the moratorium to Dec. 31, 2005, after which local governments would be free to impose access taxes if the moratorium were not extended. In contrast, Wyden's bill calls for an outright ban of access taxes and seeks to remove the grandfathering protection of those few municipalities currently applying the tax.

    Senate Commerce Committee Chairman John McCain, R-Ariz., will hold a hearing Wednesday on the Internet tax issue, in what his spokeswoman Pia Pialorsi said will be his "first step toward building consensus" and eventually introducing his own bill. Wyden's bill was referred to his committee, but Dorgan's was sent to the Senate Finance Committee.

    Working with the states
    One boost to Dorgan's bill is that it is the first piece of Internet tax legislation developed in cooperation with state and local governments. Congress last year was reluctant to completely pre-empt local authority on sales taxes and would prefer states to work out a method to simplify sales taxes so they can more easily be collected by e-tailers.

    "Businesses and consumers using the Internet to conduct commerce are potentially subject to as many as 30,000 tax jurisdictions," said Business Software Alliance President Robert Holleyman.

    Dorgan's bill would call on states to develop a one-stop source for e-tailers to gain tax information and would require uniform definitions for goods so taxes would be equitable. If 20 states were to join a compact to this effect, they could submit the plan to Congress and, if it were approved, e-tailers would be forced to collect sales taxes based on where the purchaser was located.

    The bill is backed by the National Governors' Association, the National Conference of State Legislatures, the Council of State Governments, the National Association of Counties, the U.S. Conference of Mayors and the International City/County Management Association. It also has the support of the E-Fairness Coalition, which comprises mainly so-called brick-and-mortar retailers.

    Dorgan's key Republican supporter is Mike Enzi, R-Wyo. Though he opposes an Internet access tax--"I do not support a tax on the use of the Internet itself"--he co-sponsored the bill because it will protect local sales taxes.

    "I have concerns about using the Internet as a sales tax loophole," he said. "Sales taxes go directly to state and local governments and I am very leery of any federal legislation that bypasses their traditional ability to raise revenue to perform needed services such as school funding, road repair and law enforcement. I will not force states into a huge new exemption."

    Along with banning Internet access fees, Wyden's bill sets a higher hurdle for states to clear before they can get Congress' help in collecting sales taxes from e-tailers.

    Because the access tax would be subject to a moratorium extending more than four years, industry trade groups have not yet come out opposed. For example, the Information Technology Industry Association is taking an open stance, citing the primary importance of extending the current moratorium. The Information Technology Industry Council has taken a similar position.