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Ban On E-Commerce Taxes Likely To Be Extended

Unless a political upset occurs, the only real question is how long the ban will be extended. It might be permanent.
Anti-tax advocates sympathetic to the interests--and pocketbooks--of Internet service providers went head to head with tax administrators at a congressional hearing Tuesday over legislation that would permanently ban local and state governments from taxing Internet access.

Congress has already enacted the 1998 Internet Tax Freedom Act, which was reauthorized for two years in 2001 and renamed the Internet Tax Nondiscrimination Act. The goal each time was to shelter a budding industry from local and regional taxes.

Former Virginia Gov. James Gilmor, in endorsing the legislation, noted that the Internet and PCs have empowered individuals as citizens in a democracy, as consumers, and as entrepreneurs in unprecedented fashion. "America can embrace these positive developments and promote more of it by keeping taxes and regulatory burdens on Internet access to a minimum, or it can thwart them by taxing Internet access," he testified before the House Judiciary Committee's Subcommittee on Commercial and Administrative Law.

But "the fledgling-industry argument is no longer relevant," said Harley Duncan, the executive director of the Federation of Tax Administrators. "Electronic commerce is becoming a mature and important part of the U.S. and international economy. In our estimation, there has been no showing that the purchase or supply of Internet-access services in the states that tax the services has been adversely affected. Neither has there been a showing of an undue compliance burden on Internet service providers that would justify the pre-emption. Continuing the pre-emption simply provides a special position for this particular communications medium."

If Congress reauthorizes the ban, it should be for just five more years, said Duncan, whose association represents tax administrators from the states, as well as New York City and Washington, D.C. And jurisdictions that already tax Net access should be allowed to continue assessing levies, he said.

Gilmor, who once led a congressional advisory panel on E-commerce, said Congress twice banned such levies. "These 'grandfathered' states faced a choice," he said. "They could either reverse their hasty decisions to tax Internet service or they could wait to see if Congress might change its mind."

Some states did just that, Gilmor says: Texas eliminated its tax on Internet access priced below $25 a month, and Connecticut opted to phase out its tax on Internet access all together. Washington state repealed the local tax on Internet access that the city of Tacoma had imposed. Still, nine states collect an estimated $50 million a year in Internet-access taxes.

Gilmor and others worry that allowing local and state governments to tax Internet access could replicate the problem they say confronts the telecom industry: a maze of overlapping and disparate taxes.

"Just saying it doesn't make it so," Duncan countered. Net-access taxes are simple use taxes, like those levied on other services, he said. Most telecom taxes are a result of complex decisions made by state utility boards that regulate phone services.

Jack Kemp, a former congressman and GOP presidential candidate, suggested that Congress go beyond banning Internet-access taxes and take steps to limit the ability of states to collect taxes on purchases made online. In fact, a consortium of states created a program known as the Streamlined Sales Tax Project to do just that.

"The central issue in the Internet tax debate is not fairness as the NGA National Governors Association and some others would have us believe; it is taxation without representation," Kemp said. "States have been trying for more than three decades to tax people and businesses that are located out of state because politicians are acutely aware nonresidents can't vote them out of office."

He said some states see online taxation as a way to help them balance their budgets. "But, as we have seen, economic growth, not new forms of taxation, is the key to solving budget shortfalls."

Duncan contends that states, for the most part, aren't looking to Net-access taxes to balance their budgets. "While states have had to determine the manner in which existing taxes should be applied to Internet services and electronic commerce," he said, "there was no headlong rush to devise new schemes of taxation that in some fashion targeted the electronic-commerce industry."

The bill has the backing of the Bush administration and is expected to be approved. Thus, Duncan is trying to tighten definitions so that ISPs, for instance, can't bundle Net access with other services that would normally be subjected to taxation in order to avoid any levy.