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Net tax bill under fire

Though a compromise was reached on a federal bill that would temporarily prohibit new Net taxes, one provision threatens the heart of the agreement.

Though a compromise was reached last week on a federal bill that would temporarily prohibit new Net taxes, one little-noticed provision threatens the heart of the agreement.

Of top concern is the so-called grandfather clause Rep. Chris Cox (R-California) adopted when he hammered out the agreement with the National Governors' Association (NGA).

Industry executives worry that the clause could create a loophole for localities to create new Net taxes under their existing telecommunications tax codes, for example, thus sidestepping the moratorium on new Net taxes altogether.

The grandfather clause was among several compromises in the House bill. Cox agreed to change the length of the proposed "time out" from six to three years. Along with the NGA, the move was backed by the country's other main local government groups.

President Clinton endorsed Congress shapes high-tech, Net
policy the original version of the Internet Tax Freedom Act, which aims to prevent a host of new levies targeted specifically at the booming online industry while legislators and the industry figure out how Net services should be addressed by the nation's estimated 30,000 tax jurisdictions.

But state and local leaders threatened to continue fighting the bill if concessions weren't made because they said it interfered with their constitutional right to raise revenue through taxation.

Net access providers, new media companies, and the lawmaker who sponsored the bill in the Senate charge they weren't invited to the negotiating table, and they have problems with the proposed changes.

The grandfather clause states that any taxes already imposed on Net services before March 1, 1998, would still be valid if the bill passed.

It is unclear which taxes would be grandfathered.

"Different states and localities have come up with different ways to define Net access and the taxes that apply," said Jill Lesser, deputy director of public policy for America Online.

"This clause could reward those states and localities that rushed to tax the Net, and penalize those who realized that this is not a medium they wanted to tax," she added.

AOL and others have been working with the NGA over the past 48 hours to find common ground on the grandfather clause.

Another sticking point in the compromise is the proposed creation of a commission to study whether the Net transactions or services should be taxed and, if so, how to avoid double taxation and stunting the growth of e-commerce.

The commission also would study the taxation of mail order purchases, which some see as a separate issue from the Internet.

"The problems the states have experienced with people in their states buying through mail order catalogs has nothing to do with the Net," said Mark Nebergall, a lobbyist for the Software Publishers Association.

"What the Cox compromise would do is promise the governors a floor vote on whether mail order companies should have to collect and remit mail order taxes when they don't have a physical presence in that state," he added. "We support the Senate bill, but not this compromise."

But localities argue that the mail order issue is the same problem they face with e-commerce. When an increasing number of people buy online from out-of-state companies, localities stand to lose revenue.

The NGA could pull its support of the bill if it is not happy with the outcome of the negotiations. "We're in a wait-and-see mode," said Becky Fleischauer, a spokeswoman for the organization.

Although governors from high-tech hotbeds such as California and New York have endorsed the bill outside the NGA, Cox says without local support, the legislation will have a hard time clearing Congress.

"The grandfather clause issue is not trivial, and could threaten to engulf the entire bill," Cox said yesterday.

"But I don't believe there should be any taxes on Internet access--period," he added. "If for some reason the support of the [local government groups] disappears, then we would go back to the six-year moratorium."

The House was expected to vote on the act this month, but it is unlikely, as the members will recess for about 20 days on April 2. The bill also has to be marked up by two committees.