U.S. House Votes To Extend Net Tax Ban

In an overwhelming show of support for e-commerce, the United States House of Representatives voted 352 to 75 Wednesday to extend the moratorium on Internet-specific taxes — currently set to expire in October 2001 — for an additional five years.

The Internet Nondiscrimination Act also calls for the elimination of a “grandfather” clause in the current law that allows 11 states to continue collecting those Internet access fees imposed before the moratorium took effect.

The House approved the bill “to express the sense of the House that there should be a streamlined non-multiple and non-discriminatory tax system to be utilized by the states regarding the Internet.”

However, it should be noted that there is no similar bill active in the Senate. Senate Commerce Committee Chairman John McCain (R-Arizona) put off a vote on a permanent ban on Internet taxes last month and has not rescheduled it.

The Bill

While the moratorium prohibits any new Internet-specific taxes, it does not completely ban taxes on Internet sales. Currently, states can collect retail sales tax from a remote seller, including Internet and catalog merchants, if the seller has a physical presence in the state.

Even if the House and Senate eventually agree on a bill, President Clinton is not expected to sign a five-year extension into law. The White House favors a two-year extension at most.

According to White House Press Secretary Joe Lockhart, “We support a two-year extension because, obviously, our position is that we are opposed to discriminatory or access taxes. But if you go and extend out through five years, you really run the risk of putting off some decisions that need to be made.”

Acrimonious Debate

The Internet tax moratorium has been the subject of an acrimonious debate between factions favoring the ban as a way to protect fledgling Internet businesses and those who see the tax break as hurting small retailers and state coffers.

Republicans who introduced the Internet Nondiscrimination Act, H.R.3709, say it will give much-needed tax relief to millions of middle class Americans, preserve the technology-driven economic boom, and enable more people to gain access to the Internet. House Majority Leader Dick Armey (R-Texas) said, “The bottom line is: we’re going to keep the Internet tax free.”

Democrats, who say Republicans are backing the ban to court high-tech companies, are more cautious. They claim that if one segment of the economy is exempt from taxation, taxes will have to be raised in another.

State governors are overwhelmingly against the ban. Last month, in a rare show of bipartisan unity, 42 U.S. governors sent a scathing letter to Congress claiming that a ban on Net taxes could reduce state and local tax revenues by more than $30 billion (US$) each year.

Many brick-and-mortar retailers oppose the ban because they believe it gives Internet-only companies an unfair advantage.

Not Far Enough

While applauding the House’s extension of the moratorium, some industry leaders think a plan for resolving Internet tax issues is needed.

William T. Archey, President and CEO of the American Electronics Association (AEA) said, “Today’s House vote is a major step in the right direction, but we need a comprehensive process if we are to engender meaningful nationwide sales and use tax simplification at the state and local level. The hard fact is that complex challenges regarding electronic commerce taxation still loom large.”

Archey added, “It’s our hope that a five-year moratorium will give policymakers time to create a sales and use tax system that can work smoothly for remote sales made over the Internet.”