House Committee Approves 5-Year Net Tax Ban

Lauren Dunn, Medill News Service

WASHINGTON-- A House subcommittee approved legislation Thursday that extends a ban on certain Internet taxes for another five years.

The bill, sponsored by California Republican Rep. Christopher Cox, would affect taxes on access to the Internet and those taxes--except sales taxes--specifically directed at Internet transactions. The moratorium is set to expire in October.

Though the subcommittee approved the bill without changes, Rep. Jerrold Nadler, D-New York, promises to offer an amendment for consideration by the full Judiciary Committee that would cut the extension to two years. Nadler says he hopes that a shorter extension period would push Congress to solve the issue once and for all.

While most agree that the moratorium should be extended, Cox's bill does not address the issue of Internet sales tax, which has caused heated debate between high-tech executives and state lawmakers.

A 1992 U.S. Supreme Court decision prohibits states from collecting sales taxes from retailers without a "physical presence" in the state of the buyer. Some say the decision takes away state revenue that could be used to fund necessities such as education.

"Such erosion could be large enough to compel many states to choose between reducing spending or seeking new revenue through higher tax rates or new taxes," says G. Thomas Woodward, assistant director for tax analysis for the Congressional Budget Office.

According to a report from the General Accounting Office, by 2003 there will be between $2.5 billion and $20.4 billion in revenue lost from e-commerce transactions that are not taxed.

Critics also argue that by extending the moratorium without addressing the sales tax issue, Congress isn't solving the heart of the debate.

"In an industry with profit margins as narrow as they are in retail, the lack of sales tax is a significant price advantage," says Scott Cahill, of the National Retail Federation, a trade association representing both Internet and traditional retailers. "Tax policy should not provide one retailer with a pricing advantage over another."

But the subcommittee chairman, Bob Barr, a Georgia Republican, says Cahill's fears of losing money just may not be true.

"Predictions that the Internet would hurt all retailers did not materialize," he says, adding that less than 1 percent of all retail sales are carried out on the Internet.

Rep. Bob Goodlatte, a Virginia Republican who supports a permanent moratorium, says that state governments need to take the initiative in streamlining the sales tax system, which contains more than 7000 taxing jurisdictions.

"I think the sales tax issue is separate issue," Goodlatte says. "States need to work among themselves, and I don't believe that Congress should help the states out without the states taking the lead on this issue. I'm in favor of keeping the Internet free of taxes and (Cox's bill) is a step in the wrong direction."

Currently, a group of states is in the process of simplifying their tax codes in the hope that Congress will allow them to collect taxes from Internet transactions.