Posted by : bpburnwal on Sep 27, 2003 - 11:35 AM General

The House of Representatives approved legislation Wednesday that would make permanent a 5-year-old ban on Internet-only taxes, such as levies on high-speed Internet access.
Congress passed the original Internet tax moratorium in 1998 to protect fledgling e-commerce companies from taxes that could hamper their competitiveness as they were just getting off the ground. The moratorium was extended for two years in 2001, and it expires Nov. 1 unless Congress acts.

The moratorium bans state and local governments from taxing Internet access through any technology -- dial-up, DSL, satellite or cable modem. It also forbids state and local governments from imposing taxes on e-commerce that don't apply equally to brick-and-mortar businesses.

A nearly identical measure was passed by the Senate Commerce Committee and is awaiting a final vote on the Senate floor, where it's expected to pass. The Bush administration has endorsed the legislation.

The bill approved by the House, HR 49, would close a loophole that had allowed 10 states to tax Internet access, including Texas, Ohio and Washington.

But the measure did not cover the thornier question of how to collect state sales taxes on electronic commerce. At stake in that issue are potentially billions of dollars that states say they lose from uncollected sales taxes on transactions over the Internet.

Earlier this month, the California legislature passed a bill that would require out-of-state companies that want to do business with the state of California to collect sales tax from their California customers making purchases online. Gov. Gray Davis vetoed a similar bill in 2000, but he has indicated his willingness to reconsider the issue.

In Washington, members of Congress praised Wednesday's voice vote in favor of the tax-moratorium legislation, saying it will allow the Internet to continue to flourish.

"The Internet is still transforming itself," said Rep. Christopher Cox, R-Newport Beach, author of the legislation. "We don't want tax policy to weigh it down so it can't become what it might be to serve all of us."

The Congressional Budget Office estimates that closing the loophole on the 10 states currently taxing Internet access would cost state and local governments between $80 million and $120 million annually beginning in 2004.

Cox said the legislation would help boost the economy because it will encourage continued growth of the Internet. Expanded Internet usage will add $500 billion a year to the economy over the next decade, he said.

Other lawmakers argued that the bill should be considered only in the broader context of resolving the issue of how to tax sales over the Internet.

Most purchases on the Internet have gone tax-free because of a 1992 Supreme Court decision that says companies aren't required to collect state and local sales taxes unless they have a physical presence in the state, such as a store or warehouse.

The collection of sales tax from online transactions also has been complicated by the fact that there are more than 7,500 different taxing jurisdictions in the United States that tax goods and services differently. The Supreme Court said merchants don't have to collect state sales taxes from out-of-state customers until the states simplify their tax systems.

Customers are supposed to report their online purchases to their home state, but usually don't.

A group of nearly 40 states has been working to simplify the tax code, a step in making online sales taxes a reality. Congressional action or a decision by the Supreme Court would be needed to give states the authority to begin collecting taxes from out-of-state sales, including online sales.