House subcommittee approves Internet tax moratorium

A U.S. House subcommittee has approved a bill that would permanently extend a moratorium on some Internet taxes, including Internet access taxes, despite Democrats' concerns over the impact on Mom-and-Pop businesses and whether the bill ensures a tax ban on DSL (Digital Subscriber Line) access.

The Internet Tax Nondiscrimination Act prohibits the 7,500-plus taxing jurisdictions in the U.S. from creating taxes unique to the Internet, including bit taxes, which tax Internet information as it moves across servers in many taxing jurisdictions. A current moratorium on such taxes, first passed in 1998, expires Nov. 1, and the U.S. House Judiciary Committee's Subcommittee on Commercial and Administrative Law voted by voice Thursday to send the new bill on to the full committee with a recommendation of passage.

Subcommittee Chairman Chris Cannon, a Utah Republican, pushed for the bill by saying an Internet access tax would hurt Internet service providers and hinder the growth of e-commerce, which makes up only about 1 percent of U.S. retail sales, during a time when the Internet sector is struggling financially. "Now is the worst time to subject the Internet to additional taxation," Cannon added.

The Internet Tax Nondiscrimination Act does not prohibit jurisdictions from levying sales taxes against Internet companies, as the moratorium has sometimes been misunderstood to do. The new bill does require states and other taxing jurisdictions to treat Internet sales the same way they treat other nonlocal sales, such as catalog and telephone sales. The U.S. Supreme Court has barred states from collecting sales taxes on retailers who don't have a physical presence within their borders.

Representative William Delahunt, a Massachusetts Democrat, offered an amendment that would commit Congress to work on legislation that would help states collect sales taxes from remote retailers, but he withdrew the amendment after Cannon promised hearings on sales tax collections.

Many states are "confronting their worst budget crisis since the Great Depression," Delahunt said, and small businesses are hurt because they have to collect sales tax when Internet and catalog companies from out of state do not. "By failing to ensure sales tax parity between remote sellers and Main Street merchants, we are putting at risk the thousands of small businesses that sustain our economy and contribute so much to our neighborhoods and communities," Delahunt added.

The current moratorium "grandfathered" in 10 states that had Internet access taxes before it passed, but the new bill would eliminate those taxes. Representative Tammy Baldwin, a Wisconsin Democrat, offered an amendment to restore the grandfather clause, but also withdrew it, saying she hoped the committee would work toward a "satisfactory resolution" to the problem in the future.

Baldwin's home state, one of the 10 originally grandfathered in, could lose US$55 million in tax revenue over two years if the Internet access tax is outlawed, she said. But she also admitted there's a move in the Wisconsin legislature to remove the state Internet access tax.

Representative Melvin Watt, a North Carolina Democrat, also proposed an amendment intended to ensure that DSL isn't taxed. Watt noted that three states have determined that parts of DSL service are telecommunications services subject to access taxes. Watt also withdrew his amendment when Cannon promised to try to work on a solution for DSL before the bill comes before the full committee.

"I'll support no taxation on Internet access, but it's also important to make sure that no taxation means no taxation for all access, not just some people," Watt said.

Cannon promised to work on the language of an amendment that would ensure DSL access isn't taxed, but he said after the hearing that drawing the distinction between DSL being a telecommunications service or an Internet service could be a "pretty complex issue."

Cannon said he hopes the bill will go to the full Judiciary Committee by June. The bill would still have to pass through the Senate and be signed by President George W. Bush before it becomes law.

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