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State postpones new Net taxes

The California Senate gives e-commerce a boost by voting to restrain "discriminatory" taxes on Net access and services until 2002.

    The California Senate gave e-commerce a shot in the arm this week by voting 31 to 1 to restrain "discriminatory" taxes on Net access and services until 2002.

    The state Assembly passed Rep. Ted Lempert's (D-Palo Alto) California Internet Tax Freedom Act in September, and concurred with the Senate version of the bill today. The bill is now on its way to Gov. Pete Wilson, who is expected to sign it.

    "We are really pleased, it was a hard-fought battle," said Paul Smith, Lempert's spokesman.

    "Those who rely on existing tax revenues got nervous about what we were doing. This bill protects existing local revenues," he added. "But there are no taxes on Internet access in California now, and we're are making sure it stays that way."

    Home to Silicon Valley and the country's greatest concentration of Net users, California beat Congress to the punch in approving the legislation, which aims to protect the budding e-commerce industry from new levies that could potentially stifle the ventures.

    The House of Representatives passed the federal version of the Internet Tax Freedom Act in June, but it has not yet cleared the Senate.

    Rep. Chris Cox's (R-California) version of the bill is favored by many state and local lawmakers because the three-year moratorium "grandfathers" existing taxes on Net access or online services that were imposed by states before March 1, 1998. Sen. Ron Wyden's (D-Oregon) legislation calls for a two-year time out, and doesn't include a grandfather clause.

    The California bill halts new Net taxes for three years to prohibit levies on Internet access and online services. The bill also forbids so-called bit taxes, which include "any transactional tax imposed on or measured by the amount of digital information transmitted electronically."

    However, the act does not preclude the collection of new or existing "nondiscriminatory" taxes. For example, the state and localities still can collect sales and use, business license, or utility user taxes as long as they are targeted specifically at just Net services.

    The online industry praised California legislators' action.

    "While electronic commerce currently is only a tiny percentage of all commercial transactions, there is every reason to believe this marketplace will grow exponentially," Teresa Casazza, executive director of public policy for the American Electronics Association, said in a statement. "By holding off the imposition of any new Internet taxes, [the California bill] encourages the growth of electronic commerce."

    The Internet Tax Fairness Coalition, which includes America Online and Microsoft, hopes Congress will follow California. The Senate is expected to vote on the bill when it returns from recess in September.

    "California is leading the way in protecting consumers and Main Street business from discriminatory taxation--taxation focused solely on cyberspace transactions and access," said Peter Arnold, a spokesman for the group. "California's action should serve as an example to members of both parties in Washington on why they need to pass a national version of the Internet Tax Freedom Act."