Iowa joins tax-exempt Net trend

From the heartland of America to high-tech hotbeds, states increasingly are letting Internet service providers off the hook for various taxes.

In the latest example, Iowa's Republican Gov. Terry Branstad said his legislative package next January will include the repeal of a five percent sales tax on Net access service, which ISPs usually pass down to their customers. If adopted, the state will lose $4 million in revenue, but Branstad doesn't seem to mind.

"The governor has already repealed the state tax on interstate phone calls. That has been very helpful in building economic development in Iowa because we now have a lot of telemarketing and long distance companies," said Eric Woolson, the governor's spokesman. "The absence of the tax is an incentive to attract those companies and keep them here."

Like many states, Iowa sees revenue potential in the Internet industry. Instead of taxing the budding market, however, the state wants to give it a chance to grow first.

"Whoever uses the Internet in Iowa is paying this tax. We want to remove it to encourage the use of the Net by consumers and the businesses that rely on it," added Woolson.

President Clinton shares this view, as does a growing majority in Congress. Legislation that would temporarily prohibit states and localities from creating new Net taxes gained new ground this month. (See related story)

City mayors across the country have come out against the federal plan on grounds that it stifles their municipal powers to tap new revenue streams. Still, Massachusetts, California, and Pennsylvania, for example, have hopped on the trend of not taxing Internet services. The two Eastern states have exempted ISPs from sales taxes on Net access. The Golden State has endorsed the federal bill, known as the Internet Tax Freedom Act.

"The tax [repeal] means that the cost to the consumer is less. It probably saves us 15 hours a month in manpower to not collect the tax," said Joseph Valenti, vice president of MicroServe Information Systems, an ISP in Pennsylvania.

This summer, Pennsylvania repealed a six percent sales tax that collected about $5,000 from the company's customers. Since the change went into effect, MicroServe's monthly rate went from $21.15 to $19.95.