The US Senate is close to voting on a moratorium on new Internet taxes, and the Internet business community has been closely watching the pending legislation.
Known as the Internet Tax Freedom Act, the bill would prevent states from imposing tariffs on Internet access and online services for a two-year period. During this time, a commission would be established to study the issue and decide how to tax the Net, if at all.
A Senate committee is expected to vote Thursday on the bill, which could reach the full Senate by Friday, said a spokesman for Senator Ron Wyden (D-Oregon), the bill's sponsor. With strong bipartisan support, it is expected to pass smoothly.
The bill went through a number of changes in 1997, when it passed the Senate Commerce, Science, and Transportation Committee. Amendments addressed objections raised by the US Conference of Mayors and the National Conference of State Legislatures, among others, which felt the bill would threaten state sovereignty and future tax revenue.
The latest version of the bill is "a smart public-policy move," said Frank Kelly, vice president and head of governmental affairs for Charles Schwab.
"There's no sort of uniformity to taxation on the Internet, so we think it's a good idea to take time out and figure out what to do," Kelly said. "It's not that we're trying to avoid taxes. We're just trying to avoid doing things that are damaging, such as bit taxes and bandwidth taxes that penalize people for sharing information."
For brokerage houses like Charles Schwab and others who do business on the Net, most transactions are already subject to capital-gains and dividend taxes, just as they are on the phone or in person, Kelly said.
Most states allow for some kind of tax on Internet access, sales of goods online, or sales of downloaded computer software, according to Vertex, a tax reference company that tracks Internet taxation. Only Alaska, California, Delaware, Montana, New Hampshire, and Oregon exempt all three categories from Net taxes.
Not one state has passed a law specifically taxing the Internet, said Carol Cayo, director of governmental affairs for the Information Technology Association of America. State tax administrators have simply interpreted existing tax laws to include the Internet.
"One state may apply a telecommunications tax," Cayo said. "Another may apply an information-services tax or a data-processing tax."
She cited one example of state intervention involving a small Internet service provider in Tennessee. The ISP was notified by the state that it owed several years worth of telecommunications taxes that should have been collected from its customers. Rather than collect the taxes., the ISP went out of business.
"We need to have a policy that is administerable and that people can comply with," Cayo said.
The House version of the bill, sponsored by Representatives Christopher Cox (R-California) and Rick White (R-Washington), contains a grandfather clause that would allow states that already collect Internet taxes to continue to do so.
The Senate version contains no such clause, but Senator Kent Conrad (D-North Dakota) is expected to propose such an amendment. Another amendment slated for discussion would extend the length of the moratorium to five years.
Senate leaders Trent Lott (R-Mississippi) and Tom Daschle (D-South Dakota) are expected to resolve the remaining issues on Thursday. The House version of the bill is also awaiting a floor vote.
