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May 20, 2000

SECTION: TECHNOLOGY; Pg. 1620; Vol. 32, No. 21

LENGTH: 1392 words

HEADLINE: Cautious Course on Internet Taxes

BYLINE: Neil Munro

BODY:

The White House is stepping gingerly through the contentious
Internet tax debate, as both Republicans and Democrats claim
victory in the wake of a May 10 House vote extending for five
years a moratorium on taxation of monthly Internet access
charges.

Both sides are spinning the vote: Anti-tax Republicans
say the vote on taxing access reflects a broader political
consensus to bar the collection of sales taxes from Internet
commerce. The White House and its Democratic supporters say it
reflects progress toward "leveling the playing field" between
tax-exempt Internet stores and tax-paying Main Street businesses,
or traditional retailers.

Since 1998, the White House has tried to chart a course
between local governments seeking tax revenue from Internet sales
and the tax-averse Internet industry. For example, in March,
three Administration designees on the 19-member bipartisan
Advisory Commission on Electronic Commerce abstained from voting
on final Internet tax recommendations. They issued a paper
calling for "fairness to both Internet businesses and 'bricks and
mortar' businesses." In recent months, President Clinton,
Treasury Secretary Lawrence Summers, and other Administration
officials have spoken out against taxes on Internet access fees.
But they have also called for the level playing field on which
Main Street businesses can compete against untaxed Internet
businesses.

The White House's stance on sales taxes is "ambiguous,"
said Sen. Byron Dorgan, D-N.D., who is preparing legislation to
let states collect Internet sales taxes. "The Administration
really should be more active in trying to solve this," he said.
Such equivocation is understandable, say proponents on both sides
of the issue. "It is a presidential election year," noted Lisa
Cowell, the executive director of the e-Fairness Coalition, which
represents Main Street businesses. Grover Norquist, the president
of Americans for Tax Reform, says: "They did not want to do
anything that would label (Al) Gore as one thing or another,
(partly because) Internet users are this election's version of
soccer moms."

Republican leaders opposed to Internet taxes, backed by
some Democrats from Internet-rich districts, won the May 10 vote
on H.R. 3709, the Internet Nondiscrimination Act, by a lopsided
tally of 352-75. The margin of victory bolstered their long-
running campaign to raise political and legal barriers to
Internet sales taxes. But retail, union, and local-government
lobbyists also claimed victory when one of their White House-
backed amendments, which would have reduced the moratorium
extension from five years to two, narrowly lost by a 208-219
vote. That close vote, says Cowell, shows there is growing
support among Republicans and Democrats for broad legislation
that would end the tax-free status of Internet sales.

The anti-tax Republicans, led by House Majority Leader
Dick Armey, R-Texas, say the Administration has declined to
significantly help state and local governments extend their sales
taxes to Internet transactions because it fears a backlash from
the high-tech sector against Vice President Gore. "It is an
impossible vote for somebody who answers to the electorate to
say, 'I want to tax the Internet,' " said Richard Diamond, a
spokesman for Armey. The Administration's failure to stop the
anti-tax campaign represents a real defeat for the Democratic
Party, said Norquist, because the number of Internet consumers is
growing so rapidly that it will soon be politically impossible
for politicians to extend sales taxes to Internet purchases.

Those who oppose extending the 1998 tax moratorium say
the White House helped their cause by declaring on May 10 that it
wants only a two-year extension. The five-year extension in the
Republican bill would slow states' efforts to simplify their
complicated sales tax rules; such simplification, said the White
House, "is essential for the establishment of a level playing
field among different types of businesses, including both
Internet and Main Street firms."

That statement "was extremely helpful," said a Democratic
staff member on Capitol Hill. Moreover, Democrats, backed by the
White House, lobbyists for Main Street retailers, civil service
unions, and such Republicans as Rep. Ernest J. Istook Jr., R-
Okla., passed a measure 289-138 urging sales-tax simplification
and a level playing field. "It was the first time the Congress
has gone on record indicating that there should be a level
playing field," Cowell said.

In this tax debate, both the Democratic and Republican
camps have loudly championed the uncontroversial ban on access
taxes. However, the access tax question often obscures the main
issue: whether the federal government will let the states compel
out-of-state companies to collect sales taxes whenever a state
resident buys a product online. The rapid rise of Internet sales,
forecast to reach more than $ 100 billion within a few years, is
threatening state revenues, say officials from state and local
governments. Already, Main Street chain stores have begun to
funnel their sales through Internet companies. This allows them
to evade state sales taxes, which generate roughly half of the
states' total revenue, says Cowell. Local governments say they
hope to so greatly simplify and automate their sales taxes that
the Supreme Court will reverse its 1992 decision, Quill vs. North
Dakota, which bars out-of-state collections.

The House bill, if approved by the Senate, would also
modify existing law to make it harder for local officials to
argue in federal courts against Quill. The bill is a powerful
political and legal barrier to the states' tax collectors, said
the measure's supporters. The May 10 vote "is a test vote of
where (politicians) are on the subject," said Norquist.

Norquist predicts that retailers will switch sides and
support the Internet tax ban once it becomes clear that local
governments are exaggerating the likely tax loss. A great loss of
local revenues won't occur, he says, because businesses pay a
comparable tax called "use taxes," and because consumer sales
taxes already exempt services, financial transactions, and many
products. Also, Norquist says, continued economic growth-which
last year produced state budget surpluses totaling $ 15 billion-
will cover the losses.

Despite the anti-tax success in the House, the two-year
extension of the tax moratorium stands only a one-third chance of
passing in the Senate, said Frank Shafroth, the director of state
and federal relations at the National Governors' Association. But
the five-year extension also faces an uncertain fate. The close
vote in the House, the lack of time, the press of higher priority
appropriations bills, and a cadre of opposed Senators should be
enough to derail the five-year extension, he said. "I think we're
close" to 40 votes to stop a five-year extension, Cowell said,
citing White House aid.

A two-year extension, however, would be acceptable to
Norquist and other anti-tax campaigners, partly because it would
extend the access tax ban to 2003. Norquist says he is confident
that the White House will sign any bill Congress sends it,
whether it contains a two-year or a five-year extension. On May
10, White House spokesman Joe Lockhart refused to respond when
asked whether the President would veto a five-year bill.

Cowell, Shafroth, and other lobbyists opposing the bill
agree that any delay helps the anti-tax campaign, especially
because Congress must affirmatively act to allow states to
collect out-of-state sales taxes. So Cowell and her allies will
push for some sort of grand bargain next year, in which states
will agree to simplify their taxes in exchange for the right to
collect out-of-state Internet taxes.

Of course, by then the Clinton Administration will be
history and the next President will shape the final result. That
leaves each side hopeful that its favored presidential candidate
will take its side on this complex issue.

LOAD-DATE: May 23, 2000

Document 5 of 27.


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