Internet changing our lifestyle
With the technological advances in the field of communications coupled with the growing consumer access to the Internet and other on-line services, Americans are on the verge of changing the way we shop, bank and invest, and obtain various services. This change in Americans' purchasing habits will impact the way state and local governments assess and collect sales and use taxes as well as taxes on access to various services.

Groups establish national study
In November 1996 the National Conference of State Legislatures, the National Tax Association, the Federation of Tax Administrators and the Multistate Tax Commission, anticipating the changing nature of advanced telecommunications and technology and its impact on our state tax systems, agreed to establish a national study on telecommunications and taxation. This review would include representatives from all levels of state and local governments and from the telecommunications industry. It was hoped that together, government and the private sector could identify the problems and difficulties of our present tax system and develop a more uniform and simplified method of tax collection. This method would maintain state and local government tax revenues without being an impediment to the growth of these developing industries.

NCSL is a member of the National Tax Association’s Communications and Electronic Commerce Tax Project. NCSL’s President, Senator Richard Finan of Ohio, has appointed Senator Bill Schroeder of Colorado and Assemblyman Ted Lempert of California to the Project’s Steering Committee. Both Senator Schroeder and Assemblyman Lempert have introduced legislation within their respective bodies dealing with state and local taxation of the Internet and are very familiar with the many concerns surrounding this issue.

Congress introduces internet tax freedom bills
In March 1997, Congressman Christopher Cox (R-California) and Senator Ron Wyden (D-Oregon) introduced the Internet Tax Freedom Act of 1997, H.R. 1054 and S. 442. Their bill as originally drafted would have preempted all state and local taxes on the Internet and other on-line services for an indefinite period of time. Congress would have to remove the moratorium by enacting legislation. However, it could not do so until the President submitted legislation to Congress which would establish a national and uniform system of state and local taxes of the Internet. It should be noted that the sponsors of this legislation have contended that they were only targeting new and discriminatory state and local taxes.

All national organizations representing state and local governments, including NCSL, announced their opposition to S.442 and H.R. 1054 on the grounds that the bill was so broadly drafted that almost all existing taxes on the Internet and on-line services and other telecommunications services would be in jeopardy. The non-partisan and well respected Congressional Budget Office classified the original version of the legislation as an unfunded mandate under the provisions of the Unfunded Mandate Reform Act of 1996 (UMRA), as states would lose over $50 million a year in expected revenues.

Lobbying inspires changes in legislation
As a result of intense lobbying from state and local government organizations, we were successful in convincing the sponsors of the legislation to re-draft many provisions of the original bill. Changes were made pertaining to what taxes would be included in the moratorium, the scope of how those taxes would be impacted, establishing a definite or date-certain moratorium, and including language that would direct the President to use the findings of the NTA’s Communications and Electronic Commerce Tax Project. As a result of these amendments to the original draft of S. 442 and H.R. 1054, NCSL withdrew its opposition.

At the end of the first session of the 105^th Congress, S.442 had been reported from the Senate Commerce Committee. In the House, H.R. 1054 was reported by the Subcommittee on Telecommunications to the full Commerce Committee and by the Subcommittee on Commercial and Administrative Law to the full Judiciary Committee.

Since December 1997, the sponsor of H.R. 1054, Representative Chris Cox, has negotiated further changes with Governor Mike Leavitt of Utah. Those changes resulted in a new version of the Internet Tax Freedom Act which NCSL along with all the other state and local organizations endorsed on March 19, 1998. Those changes included:

• Clear and specific definitions of the type of taxes which would be included in a moratorium;
• A date certain end to the moratorium of not more than three years;
• A grandfather clause to protect the twelve states which presently enforce and collect a tax on Internet access; and,
• A mechanism to identify the issues involved in applying state and local taxes and fees to electronic commerce and to develop recommendations including model tax legislation, regarding the fair applications of such taxes.

Status of legislation
On June 23, 1998, the full House passed by voice vote H.R. 4105, a revised version of the Internet Tax Freedom Act. The bill represents a merger of H.R. 3849 by Rep. Christopher Cox (R-Calif.), approved 41-0 by the Commerce Committee on May 14, 1998, and H.R. 3529 by Rep. Steve Chabot (R-Ohio), approved by voice vote of the Judiciary Committee on June 17, 1998. The new bill was endorsed by the chairmen of both committees, Representatives Tom Bliley and Henry Hyde, respectively.

H.R. 4105 includes the three-year moratorium on bit, discriminatory, multiple, and internet access taxes. It maintains the grandfather clause for those states that currently have in place a sales tax on internet access service. In addition, it limits grandfather protection to the following eight states: Connecticut, Wisconsin, Iowa, North Dakota, South Dakota, New Mexico, Tennessee, and Ohio. (if reaffirmed by state legislature within one year of enactment).

Before adjournment, the Senate passed S. 442 and Congress gave final approval to the bill, which was contained in the Omnibus Spending Bill, H.R. 4328. This version would: impose a three-year moratorium on state and local taxes on Internet access; include a grandfather provision for the states presently taxing Internet access; and create a 19-member advisory commission to study electronic commerce. It was this version that President Clinton signed into law October 21, 1998.

Electronic commerce tax project
During the lobbying efforts on the various versions of the Internet Tax Freedom Act, the NTA Electronic Commerce Tax Project has continued its work. The Steering Committee of the Tax Project has been meeting regularly and has begun identifying what both sides consider problems and their possible solutions. In response to the draft Report No. 1 of the Tax Project concerning the collection of sales and use taxes, the government members of the Steering Committee have agreed to support simplification of the sales tax system providing any changes "comport with common notions of federalism." On January 1, 1998, the government members of the Tax Project in their response stated:

The members of the Steering Committee of the Electronic Commerce Tax Project last met November 19-20, 1998, in Washington, D.C. The next meeting is scheduled for July 1999. For more information on the NTA Communications and Electronic Commerce Tax Project, please visit its web page: http://www.nhdd.com/nta/ntaintro.htm.

Commerce and Communications Committee

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