House Panel: Thumbs Up to Extension of Internet Tax Ban

A House of Representatives Judiciary subcommittee Friday approved, by voice
vote, a bill that would extend the current moratorium on taxes targeting the
Internet by five years and bar Internet access taxes permanently.

The original moratorium stems from the Internet Tax Freedom Act, passed by
Congress in October 1998. The act imposed a three-year moratorium on
Internet access taxes and on multiple or discriminatory taxes on electronic
commerce. Last year, the House voted 352-to-75 to extend the moratorium an
additional five years — to October 2006 — through the Internet
Non-Discrimination Act, a bill sponsored by Rep. Christopher Cox (R-Calif.)
and amended by Reps. Bob Goodlatte (R-Va.) and Rick Boucher (D-Va.).

But that bill did not make it out of a conference session with the Senate
before the current Congress took office, and so the legislature is
revisiting the issue with the current moratorium set to expire on Oct. 21.

Rep. Cox is also the sponsor of the current bill, which would extend the
moratorium on Internet-specific taxes to Dec. 31, 2006. Reps. Goodlatte and
Boucher, meanwhile, have introduced a different bill, which they call the Internet Tax Fairness Act.
Their bill would permanently extend the moratorium on Internet access taxes
and electronic commerce taxes while clarifying the current nexus standard
for business activity taxes.

Rep. Cox’s bill does not deal directly with the issue of state sales taxes
and whether they should be applied to e-commerce transactions. Rep. Mel Watt
(D-NC) attempted to change that with an amendment giving states five years
to simplify their sales tax codes before Congress revisits the issue in
2006, but Rep. Bob Barr (R-Ga.), chairman of the Judiciary subcommittee
refused to allow a vote on the amendment, saying the amendment was unrelated
to the matter at hand.

Currently, Internet sales are handled in the same way as catalog and
telephone sales: If the retailer has a store in the purchaser’s state, a
sales tax is supposed to be added to the bill. But the Supreme Court has
ruled that companies cannot be required to collect taxes in states where
they have no physical presence.

Pure-play e-tailers have contended that if they are required to collect
sales tax and pay them to the appropriate agencies, they will be forced to
figure out how to accommodate about 7,600 state and local taxing
jurisdictions, each with different rates and rules.

States and local governments, on the other hand, depend upon sales taxes for
about a third of their revenues and have been less than willing to give up
on the tax revenues generated by e-tailers.

Rep. Cox’s bill is expected to reach the House floor in September when
legislators return from the August recess.

Meanwhile, a bi-partisan group of senators have been trying to push through
a bill in that chamber. In February, Sen. Ron Wyden (D-Or.) sponsored a bill
that would extend the moratorium to Dec. 31, 2006 and would also encourage
states to transition toward a uniform tax code for Internet usage. There has
been little movement on Wyden’s bill to date.

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