Net tax bill: Washington gets it

This week, the House of Representatives passed the Internet Tax Freedom Act--possibly the most important bill for the high-tech industry that Congress will consider this year.

4 min read
Several years ago, a senator, responding to a series of allegations about his conduct, replied, "I just don't get it." Fairly or unfairly, that line became the symbol for many of how out of touch lawmakers in Washington had become.

Times may be changing. This week, with an overwhelming voice vote, the House of Representatives passed the Internet Tax Freedom Act--possibly the most important bill for the high-tech industry that Congress will consider this year.

The progress of this bill, which is sponsored by California Republican Chris Cox, has been marked by unanimity and forward-thinking leadership on the part of both Republicans and Democrats. For example, two separate House committees (Judiciary and Commerce) declared jurisdiction over this bill. Ordinarily, that is a recipe for gridlock.

Yet in each case, committee chairmen such as Henry Hyde (Illinois) and Thomas Bliley (Virginia) and senior Democrats such as John Conyers and John Dingell put aside turf disputes so that the bill could be passed quickly and overwhelmingly. In the House Commerce Committee, for example, the vote was 41-0. Last week, in the Judiciary Committee, the bill passed by voice vote, which is typically an indication that there is little or no opposition.

Now it is up to the Republican-led Senate to match the House and pass the bill. Majority Leader Trent Lott has not scheduled a floor vote on this bill, which passed the Senate Commerce Committee last November.

President Clinton has already stated his administration's strong support for the legislation.

Why is the Internet Tax Freedom Act so important? A KPMG Peat Marwick survey of U.S. financial executives found that ambiguous state and local taxes are already inhibiting a majority of their companies' efforts with online commerce. Twenty percent were so confused by the tax situation that they did not know if their companies were even subject to taxes for product sales over the Internet.

Consider how the Internet is changing the online brokerage industry. Online brokerage was one of the first industries to conduct business successfully over the Internet. Online brokerage creates tremendous value for investors by providing instant access to current market news, quotes, account balances, and trading.

Investors placed an average of 192,000 trades per day over the Internet during the first quarter of 1998. This is up from 153,000 per day the last quarter of 1997, a 25 percent increase in just a few months. It is estimated that online trading will account for 25 percent to 30 percent of all retail trading in 1998, up from 17 percent in 1997.

This rapid growth would not have been achieved had there been burdensome and complicated regulations and taxation of online brokerage transactions. This vibrant new industry could be dramatically impaired if America's 30,000 potential taxing jurisdictions were each allowed to develop a unique approach to taxing transactions conducted through the Internet.

For example, an investor in Connecticut may be on a business trip in New York. While in New York, he decides to place a trade through the Internet. That transaction could be routed back to his Internet service provider in Connecticut and then to the his online broker in California. Before he places his trade, he decides to check out a couple of Internet sites to do research. These sites could be located in Illinois, Washington, and Florida.

In all, this investor has "touched" six states and numerous local jurisdictions. If each were allowed to tax some portion of this transaction, it would obviously deter the investor from using the Internet for his investments.

The Internet Tax Freedom Act protects online consumers from this scenario. It also protects them from state or local tax levies based solely on the path in cyberspace through which their order is routed.

The expansion of the information technology sector, which is fueled by the growth of the Internet, has been the engine of America's economy during this decade. According to the Commerce Department, more than one-quarter of America's economic growth this decade is due to information technology.

A moratorium on Internet taxes is vital so that government and industry are able to study further the unique challenges the Internet presents and ensure that rational tax policies are developed. This will allow the Internet to flourish and consumers to enjoy cyberspace's full potential.

Gideon Sasson is enterprise president of electronic brokerage for Charles Schwab with overall responsibility for the general management and strategic vision of Schwab's e-commerce business. In addition, he is executive vice president and serves on the management committee of the Charles Schwab Corporation. Sasson is also a spokesperson for the Internet Tax Fairness Coalition, a group of Internet and high-tech companies that supports the fair and equitable tax treatment of the Internet and online services.