Internet bill compromise reached

Cities and counties were holding their collective breath over the fate of the Internet Tax Freedom bills. Now, though, they should be able to breathe easier.

The bills, introduced in the Senate by Oregon Democrat Ron Wyden and in the House by California Republican Chris Cox, would have prohibited states, cities and counties from establishing any new Internet access or online taxes until Jan. 1, 2004. Local government groups, like the National League of Cities, the National Association of Counties, the Government Finance Officers Association and the U.S. Conference of Mayors, were aghast at the staggering amount of revenue local governments stood to lose. In fact, Cambridge, Mass.-based Forrester Research estimates that Internet sales and services will grow from $36.4 billion at the end of 1997 to more than $217 billion by the year 2000.

Just two months ago, the NLC and the National Governors’ Association had published a book entitled, “Is the New Global Economy Leaving State and Local Tax Structures Behind?” According to the publication, the answer was “yes.”

In their original forms neither bill would have affected the ability of cities and counties to impose traditional sales, income, business license and other conventional taxes on Internet Service Providers. That, however, was small consolation to local governments, which were concerned about President Clinton’s late-February endorsement of the legislation.

Now, local governments are resting easier. Negotiations between a group of 12 local officials, 12 business representatives and eight academicians, under the aegis of the Electronic Commerce Project, have helped produced the compromise bill cities and counties were seeking. Offered by Cox as a substitute amendment to the original House bill, the new bill would limit the state and local tax moratorium to six specific taxes that directly affect electronic commerce.

In effect, the bill precludes 30,000 taxing jurisdictions from taxing Internet access or online services; imposing new taxes on electronic commerce; discriminating against Internet commerce; imposing bit and bandwidth taxes; and imposing taxes that would affect electronic transactions more t han once. Additionally, the tax moratorium would extend only to Jan. 1, 2001, instead of 2004.

Cox’s new bill also would establish a 29-member Commission on Electronic Commerce to examine a range of issues involving sales and use taxes by remote sellers (like catalogue and Internet transactions). The commission would have two years to make a report and recommendations to the president and Congress on matters including uniform definitions and administrative simplifications. The bill sets up an expedited process for congressional consideration of those recommendations.

The commission also would study implementation of single sales tax rates within the states. Currently, about 20 states have a single state tax rate, while five have no sales tax at all. The legislation would require remote sellers to collect sales and use taxes for goods and services sold in complying states.

The organizations representing local government, as well as the National Governors Association, have endorsed Cox’s substitute bill. NLC President Brian O’Neill, a Philadelphia city councilmember, had called the original bill “a significant infringement on state and local sovereignty [that would] create considerable budgetary problems.” In a statement released on Mar. 19, he said the substitute would “lead to a much fairer, simpler and less intrusive system than we have today.” House action on the substitute bill was expected in late March.