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California calls timeout on Internet taxes

August 26, 1998
Web posted at: 11:35 AM EDT

by Mike Hogan

(IDG) -- A moratorium on Internet taxes became law in California on Monday, although time is running out on similar federal legislation as the 105th Congress begins its countdown to adjournment.

Governor Pete Wilson signed the California Internet Tax Freedom Act, which imposes a three-year moratorium on taxes for any Internet activity, including both access through an Internet service provider and purchases made online.

Will rest of country follow?

However, that leaves an estimated 30,000 other taxing jurisdictions with the ability to levy a taxes online, warns the Internet Tax Fairness Coalition. In fact, 12 states collected an estimated $3.8 million in taxes for purchases made over the Internet in 1997, according to a study commissioned by the Software Publishers Association. That's a drop in the bucket compared to the potential tax liability as the Internet continues to expand, warns the Fairness Coalition, a group of high-tech businesses, trade associations, and individuals that wants a federal moratorium declared on access taxes and to have e-commerce taxed in the same way as other remote commerce by mail, phone, or fax.

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In July, the House of Representatives overwhelmingly approved a bill calling for a three-year moratorium on Internet access taxes, and the Senate Finance Committee recommended a two-year moratorium. Mark Nebergall, SPA vice president and counsel for finance and tax policy, expects the full Senate to vote on its version of the moratorium by mid-September.

"We fully expect that it will pass by overwhelming margin when comes to the Senate floor," says Nebergall. "But there aren't very many legislative days left and there's a lot of work left to be done by the Senate on the passage of appropriations bills. It will be difficult to fit in."

Even if it passes, there will be only two to three weeks for a conference committee to be formed to work out differences in the House and Senate versions and to have a reconciliation bill approved by both House and Senate. If it reaches his desk in time, President Bill Clinton has already indicated he would enthusiastically sign such legislation into law.

"If it doesn't happen, the legislation will die with the adjournment of this Congress and it will have to be taken up all over again by the 106th Congress," notes Nebergall. "That would represent a serious loss of momentum."

Some groups for Net taxes

Although Internet tax moratoriums seem to have widespread support, there are groups like the National Governors' Association with strong reservations about different aspects of the legislation. As the moratorium proposals have worked their way through legislative bodies, their terms have tended to decline from six years to two; this is one of the principal provisions that will have to be reconciled by the joint Congressional committee. There also is disagreement over whether the 12 states already levying taxes should be permitted to continue to do so.

An NGA position paper expresses concern that Internet businesses will be exempt from taxes at the expense of Main Street: "State and local leaders advocate treating businesses equally whether they sell goods in a local store, on the phone, or over the Internet. Federal legislation should not create a protected class of taxpayers at the expense of Main Street and other taxpayers."

Wilson is one of a handful of governors--mostly those heading the nation's largest state economies--who have written Congress expressing disagreement with the NGA's official position and urging speedy passage of a moratorium on Internet taxes.

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