Senate Panel Approves Internet Tax Moratorium

Floor Action Delayed Until Next Spring

By Larry Jones

ljones@usmayors.org

By almost a 3 to 1 margin, the Senate Commerce, Science and Transportation Committee approved S. 442, the Internet Tax Freedom Act of 1997 on November 4. The committee adopted a revised version of the bill sponsored by the committee chairman, Senator John McCain (AZ), and Senators Ron Wyden (OR), Conrad Burns (MT) and John Kerry (MA). Although several Democrat and Republican members voiced strong opposition, the bill was adopted by a vote of 14-5, and very little time was allowed for discussion. Under the proposal, a moratorium would be imposed on state and local authority to tax Internet access services, online services, and communications or transactions conducted over the Internet until January 1, 2004.

The U.S. Conference of Mayors and other state and local groups strongly oppose the bill because it could preempt a broad range of existing state and local taxes. It could do so because the structure of the bill is flawed. Under the bill, a broad federal preemption would be imposed on state and local taxes. Then, to protect certain state and local taxes, the measure would exempt a generic list of taxes. Just what would be covered by the generic list is open to question. Because there is such a broad range of state and local taxes, state and local governments would be forced to defend an unknown number of specific taxes in court throughout the period of the moratorium.

State and local groups also opposed the bill because it would allow sales over the Internet to be treated like mail-order catalogue sales, which do not require merchants to collect state and local taxes on out-of-state sales. On behalf of state and local governments, Senator Slade Gorton (WA) raised the issue and voiced opposition to the bill. He blasted the Supreme Court decision (Bellas Hess, Inc. v. Department of Revenue of Illinois) that allows individuals to avoid paying taxes on mail-order sales from state and local sales taxes. He also told members of the committee that if the bill is enacted, state and local governments stand to suffer significant revenue shortfalls. Gorton said when the bill reaches the Senate floor he intends to address the issue of mail-order tax sales.

Although Senator Ron Wyden, the original sponsor of the bill, claimed that the bill would exempt traditional state and local sales taxes, income taxes, property taxes, business license taxes and franchise fees, Senator Byron Dorgan disagreed. He said of the bill "We don't know what we're exempting and we don't know why we're preempting." Dorgan also explained that the committee had not identified the problem that the bill intends to address. He said claims that the bill was attempting to stop or prevent discriminatory taxes against the Internet could not be justified.

Senate floor action on S. 442 is not likely before next Spring. Last month Senate Majority Trent Lott (MS) said that he would encourage Senators to talk with state officials to find out how the bill would impact their revenues before he schedules the bill for action on the Senate floor.