House Extends Ban on Internet Taxes For
Five Years By
Larry Jones Despite opposition from mayors
across the nation, 39 governors, chief executives of some of the nationÕs
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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