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Senate Panel Approves Internet Access Tax Ban

A Senate committee Thursday approved legislation to permanently extend the existing temporary ban on Internet access taxes that expires on Nov. 1. The bill amends the Internet Tax Freedom Act (IFTA), which imposes a federal moratorium on state and local taxes on Internet access services and certain Internet-based sales transactions.

A similar version of the bill has already been approved by a House committee.

Members of the Senate Commerce Committee said additional taxes on Internet access would amount to double taxation and would further raise the cost barriers for the approximately 50 percent of Americans who are not wired.

If a moratorium, permanent or otherwise, is ultimately passed by Congress, it would not, in all probability, apply to the growing movement to enforce sales taxes on Internet sales.

"In past years, the debate over the moratorium has been mixed with several states' efforts to broaden their authority to collect sales taxes from remote sellers," Sen. John McCain (R.-Ariz.), chairman of the Senate Commerce Committee, said at a hearing on the bill earlier this month. "In fact, many people even today seem to think that the Internet tax moratorium...is a ban on sales taxes on e-commerce transactions. It is not."

Currently, sales and use taxes are owed on all online transactions, but states are prohibited from requiring remote sellers to collect and remit those levies. A 1992 U.S. Supreme Court decision said states can only require sellers that have a physical presence or "nexus" in the same state as the consumer to collect so-called use taxes.

The court ruled that the current patchwork of roughly 7,500 taxing jurisdictions across the country is too complex and burdensome for online retailers to charge and collect sales taxes. In order to collect the taxes, the court ruled, states would need to first simplify the existing system.

In November, representatives from 32 states approved model legislation designed to create a system to tax Web sales. Spearheaded by the National Governors Association (NGA), the Streamlined Sales Tax Project (SSTP) would require participating states to have only one tax rate for personal property or services effective by the end of 2005. Included in those services would be online sales.

The coalition of states voted to require participating state and local governments to have only one statewide tax rate by 2006 for each type of product taxed.

"The sales tax question is a matter of significant importance and I look forward to seeing if there is evidence that the states participating in the SSTP have advanced towards true sales tax simplification," McCain, who promised a separate hearing on the issue later this year, said.