September 23, 1998 4:15 PM PDT

Net Tax Freedom Act stalled

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A closely watched bill that would temporarily halt new taxes on Net access and services had been scheduled for a Senate debate today, but has been put on the back burner.

The Internet Tax Freedom Act was passed by the House in June, and imposes a three-year ban on "discriminatory" Net taxes. However, that version of the bill contains a controversial clause that "grandfathers" taxes on Net access or online services that were collected by states before March 1, 1998.

The Senate was slated to consider amendments to its Finance Committee's version of the bill before noon today, but continued debating the Consumer Bankruptcy Protection Act instead.

A spokesman for the Senate Republicans said the Net tax bill was not brought to the floor for consideration because an agreement couldn't be reached over amendments Democrats wanted to add to the bill.

Unlike the House bill, the Senate version contains a two-year, rather than a three-year, moratorium, and does not contain a grandfather clause, though such a provision still could be added to the bill.

"We are aware of an amendment that could be offered that would restore the grandfather clause in the Senate bill," Mark Nebergall, vice president of government affairs for the Software Publishers Association, said today.

"A grandfather clause makes for poor tax policy, and we have always believed that the Internet Tax Freedom Act should not grandfather any taxes because it would undermine the theory to have a national time-out on Net taxes," he added.

Despite an endorsement by President Clinton and the National Governors' Association tempering its opposition to legislation that contains a grandfather clause, the Net Tax Freedom Act has hit major snags.

Opponents of the grandfather clause say it could stifle revenues for budding e-commerce and online services. The online industry also wants a longer moratorium.

Groups such as the Internet Tax Fairness Coalition, which includes Microsoft and America Online, have been lobbying against the grandfather clause on grounds that it could let states and localities apply old tax codes to the Net.

For example, a state revenue department could determine that existing telecommunications and utilities taxes apply to Net services. Some states already do this.

The bill passed by the House mandates that states reenact any Net taxes they want to grandfather. The online industry is supportive of this concession because it will force a public debate about proposed levies on Net services. On the other hand, the grandfather clause amendment expected in the Senate will not contain this requirement, sources said.

 

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