On-Line Market Battles the Tax Man

P> Executives in the infotech industry are preparing for a nationwide lobbying campaign against state-level plans to tax the fast-growing on-line industry.

On May 3, the Florida state legislature scrapped a controversial plan to tax on-line services, following a strong lobbying campaign by infotech executives.

A 1984 state law gave Florida's tax officials the authority to levy a 7 percent telecommunications sales tax on businesses and a 2.5 percent gross receipts tax on telecommunication providers. Last year, Florida's Revenue Department sought approval from the legislature to levy these taxes on Internet service sales and providers, prompting an intensive lobbying campaign by information technology companies.

"It would have put the state at a severe competitive disadvantage," said Fran Conaway, vice president of communications for the Florida Chamber of Commerce, which led the fight against the taxes. If approved, the taxes would have dissuaded businesses from locating in Florida or doing business in the state, Conaway said.

Under pressure from industry, the legislature barred the Revenue Department from taxing on-line providers and services for one year. It also commissioned a study of telecommunications taxes.

The Florida fight reflects a nationwide trend by states to offset the increasing cost of local government operations with taxes on emerging markets. State officials also see on-line taxes as a way to recoup sales taxes potentially lost if on-line commerce grows.

Many states extract taxes from the on-line industry under existing revenue, telecommunications or sales taxes. These states include Pennsylvania, Hawaii, New Mexico, South Dakota and Texas.

In response, the Information Technology Industries Council is considering launching an industry-funded lobbying campaign, said Jan Goebel, a spokeswoman at the Washington-based group. On-line taxes are bad because they might slow the development of the nation's information networks, she said. ITI's members include companies that supply the hardware and software needed by the fast-growing on-line and Internet businesses.

Also, the Interactive Services Association, based in Silver Spring, Md., has begun writing a white paper to educate state officials, said Bob Smith, the association's executive director. The white paper should be completed by July.

In California, state Sen. Herschel Rosenthal withdrew a bill that would have set up a commission to determine whether on-line companies locate outside the state to avoid the state's sales taxes.

California charges a 7.25 percent to 8.5 percent sales tax on all product purchases, including those bought via on-line services. In place of the bill, Rosenthal has asked a legislative analyst to study the impact on the on-line industry, after which he will consider introducing a bill to eliminate the sales tax on on-line purchases.

"If [on-line taxes] take root [in California], it will spread all over the place," slowing the development of on-line commerce, said Goebel.

Industry officials say the debate is just beginning, and may result in expensive lobbying campaigns against on-line taxes in many states, a multistate tax agreement or a standard federal tax.

"If we are to have some kind of tax, it needs to be sensible and it would be nice [if it were] uniform" across the nation, Smith said.

To help settle the issue, the on-line industry could agree to a nationwide on-line tax that would be paid by subscribers according to how much they use the networks, suggested David Johnson, a Washington-based lawyer. Johnson is a founder of Counsel Connect, an on-line service for lawyers.

A nationwide tax could even help the infotech industry if the tax money is used to buy improved on-line security, which is needed for on-line commerce, said William Malik, a consultant at the Gartner Group, Stamford, Conn.

But a nationwide tax is unlikely, predicted Frank Dzubeck, an analyst with Washington-based Communications Networks Architects Inc. The on-line industry must learn to deal with an inevitable patchwork of local taxes, just as the computer companies learned long ago to cope with many states' different sales taxes, he said.