Congress Staves Off Taxing E-Commerce - But Then What?

Congress Staves Off Taxing E-Commerce - But Then What?

Gov. James Gilmore

By Anne Gallagher, Contributing Writer

Extending the current moratorium on electronic commerce taxation has broad support on Capitol Hill, but there is little consensus on how to move beyond a quick fix or make permanent policy any time soon.

Lawmakers, having had time to review recommendations released April 6 by the Advisory Commission on Electronic Commerce, seem eager to pass some form of legislation in the next few weeks to extend the current moratorium prohibiting new taxes on Internet transactions.

The commission, chaired by Virginia Gov. James Gilmore (R), has recommended extending the moratorium on multiple and discriminatory taxation of e-commerce for an additional five years through 2006.

However, the moratorium does not prevent state and local governments from collecting sales taxes that existed before the moratorium was first imposed in October 1998.

Over the past few months, several versions of legislation to extend the moratorium have surfaced on Capitol Hill, leaving room for some compromise on how long the extension should be. But lawmakers and staff members said they expect the commission's five-year extension proposal to be adopted broadly in both chambers.

Rep. Christopher Cox, R-Calif., one member who has been pushing for the action, said he expects to see passage very soon.

"In the House we are preparing to move forward quickly ? before Memorial Day ? with legislation to implement the central recommendations in the commission's report to Congress," Cox said. "A first point of consensus is that the Internet should not be subject to new, multiple or discriminatory taxes."

The commission also has recommended that Congress eliminate the 3 percent federal telephone tax, also known as the Spanish American War tax. Cox called it a "1898 'luxury tax' on telephones" that "is no longer needed."

In the House, Ways and Means Committee Members Reps. Rob Portman, R-Ohio, and Robert Matsui, D-Calif., have introduced legislation to repeal that tax. There is a companion bill in the works in the Senate, introduced by Senate Finance Committee Chairman William Roth, R-Del., and Sen. John Breaux, D-La.

"With all this bipartisan support ? directly brought about by the commission's report ? Congress is on track to bring a final end to the Spanish-American War," Cox said. "It is time to repeal the tax and declare victory."

While these legislative initiatives appear to have much backing, the e-commerce taxation issue becomes thorny when permanent policy changes are discussed. There is a move on the part of the Republican leadership to keep the Internet completely tax free, while the Clinton administration has been reluctant to support a plan that is not flexible for possible taxation down the road.

Meanwhile, state and local officials have voiced many concerns about declining revenue if their governments cannot collect sales taxes on Internet transactions.

"Governors want to ensure we will continue to have the ability to provide vital services like public education, roads, and police protection to our citizens," said Utah Gov. Michael Leavitt (R).

Leavitt, who chairs the National Governors' Association, said that 42 governors oppose the commission's report. These governors contend that the federal government would be pre-empting state sovereignty by dictating their tax policies.

Similarly, the National League of Cities has called on Congress to reject the commission's recommendations.

"I hope that Congress will see this report for what it is: a self-serving, loophole-laden scheme that benefits a few big business and could mean the end of the sales taxes as a source of revenue to support basic public services," said Bob Knight, president of the league and mayor of Wichita, Kan., in an April 4 statement.

House Commerce Committee Chairman Tom Bliley, R-Va., is adamantly opposed to e-commerce taxation and is one of the key players in the fight for a permanent moratorium.

"I know that some claim that tax revenues will erode unless states and localities have the ability to tax online retailers," Bliley said. "But I have yet to see evidence that conclusively shows that e-commerce threatens state and local tax revenues. Quite the opposite: All the evidence points in the opposite direction. If the states and localities are permitted to tax e-commerce and Internet access, consumer demand will wither."

Regarding a long-term taxation policy, about the only thing the differing camps agree on is that a decision will not be made before the adjournment of the 106th Congress and that it will emerge as an election issue for November.

Meanwhile, information technology providers also are working to reach a consensus on all of the commission's recommendations, IT industry officials reported. While many in industry do not want the Internet taxed, there are other issues they also want addressed.

Some IT officials, for example, have complained that public-sector agencies, in their zeal to develop and deploy Web-based software services for consumers, are creating products and services that compete with the private sector.

Examples include the recently announced plans by the Postal Service to begin offering electronic bill presentment and payment as a government service. Another example is a plan by the Internal Revenue Service to procure and launch commercial electronic tax preparation software services for consumers, they noted.

"As government agencies seek to re-engineer and expand their missions, they are moving into commercial territory," Edward Black, president and CEO of the Computer and Communications Industry Association said in a March 20 letter to Gilmore. "Government competition in electronic commerce severely impacts private e-commerce markets, because few businesses can stand up to the virtually unlimited resources of the public treasury."

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