Washington Outlook

House Extends Ban on Internet Taxes For Five Years

By Larry Jones
May 15, 2000

Despite opposition from mayors across the nation, 39 governors, chief executives of some of the nationŐs largest retail outlets, and labor and education organizations, the House passed H.R. 3709, the so called Non-Discrimination Act on May 10 by a lopsided vote of 352 to 75. The bill extends the current three-year moratorium on new Internet taxes for five years. This effectively changes the expiration date in the Internet Tax Freedom Act from October 21, 2001 to October 21, 2006. The Conference and other state and local groups oppose the proposed legislation because it does not address the more pressing problem—correcting a loophole in the tax systems that allow tax-free sales over the Internet. Further, they are concerned that the longer Congress waits to address this problem, the more difficult it will become to pass the needed legislation.

Why the Rush to Pass H.R. 3709?

"It concerns me that Congress is rushing to pass a five-year extension before the current moratorium expires, while at the same time ignoring concerns from state and local governments who stand to lose $20 billion annually by 2003 if legislation is not enacted to assist them in collecting on remote sales," said Dallas Mayor Ron Kirk, who is the lead mayor for the Conference on this issue. He said "it seems they have their priorities mixed up." A May 11 Washington Post article on "Internet Tax Ban Renewed by House"may explain why passing this bill is a top priority. It states that, "computer company executives have contributed $13 million to House and Senate candidates during the current election cycle—evenly divided between Republicans and Democrats—according to the nonpartisan Center for Responsive Politics."

How the Bill Would Affect State and Local Governments Under the proposal adopted by the House, state and local governments would be prohibited from imposing multiple and discriminatory taxes on the Internet. Also, existing and future state and local taxes on Internet access fees would be prohibited. A grandfather provision was included in the original legislation to allow current state and local taxes on Internet access fees to continue during the moratorium. But H.R. 3709 would repeal the grandfather clause, which would mean those states currently collecting taxes on Internet access fees—Connecticut, Montana, New Mexico, Ohio, South Carolina, South Dakota, Tennessee, Texas, Washington, and Wisconsin— would face an immediate reduction in revenues. These states could lose an estimated $75 million annually.

Criticisms of the Bill

During floor consideration, Rep. John Conyers (MI) and other opponents of the bill criticized the leadership for taking action on the bill without holding a single hearing. Rep. William Delahunt (MA) also took issue with the length of the moratorium, pointing out that passing a five-year moratorium will damper any political momentum for Congress to address this problem. In the meantime, he said state and local governments are losing a huge amount in revenues because current law prevents them from requiring remote sellers to collect their use taxes.

Votes on Key Amendments

On behalf of state and local governments and the retail industry, Rep. Delahunt offered an alternative amendment that would have extended the moratorium for two instead of five years, and it would have retained the grandfather provision to allow existing state and local taxes on Internet access fees to continue. Although members did not approve the amendment, it was defeated by a slim margin, 208-219. And it attracted the votes of 37 Republican members and most Democrats. This shows there is a significant amount of support for a shorter moratorium.

On another important vote, members rejected an amendment offered by Rep. Steve Chabot (OH), that would have made the moratorium permanent on state and local taxes on Internet access fees, multiple and discriminatory taxes. The amendment failed by a huge margin, 90 to 336. Members also approved by a vote of 289 to 138, a non-binding resolution sponsored by Rep. Ernest Istook (OK), that encourages states to work together to simplify their sales and use tax systems to ease collections by remote sellers. Rep. Spencer Bachus (AL) also offered an amendment that would have provided for a five-year extension of the moratorium and authorized state and local governments to enter a compact to simplify their sales and use tax system to ease the tax collection burden on remote sellers. However, he withdrew his amendment because it was not considered germane.

Senate and White House Position on the Bill

With the passage of H.R. 3709, attention shifts to the Senate where Senator John McCain (AZ) is sponsoring a similar five-year extension bill. However, the fate of the bill is uncertain since Senator McCain has failed to line up enough support to report the bill out of the Senate Commerce Committee. Also, the bill is likely to be jointly referred to the Senate Finance Committee which could make it difficult to move the bill as quickly in the Senate. A bipartisan group of Senators including Byron Dorgan (ND), Slade Gorton (WA), George Vionovich (OH) and Bob Graham (FL) are working with state and local groups, and representatives of the retail industry to craft an amendment that they plan to offer on any extension bill to address state and local concerns.

The White House opposes to a five-year extension of the moratorium and has issued a statement claiming that the bill would "delay consideration of important Internet tax issues and will hinder, not foster, tax simplification efforts by the states." However, the White House has not indicated whether the President will veto the House passed bill.

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