October 8, 1998 11:55 AM PDT

Senate passes Net tax act

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Congress facing broad Net issues

September 18, 1998
The Senate sweepingly passed the Internet Tax Freedom Act today, calling for a three-year time-out on new tariffs for online services and products.

President Clinton has vowed to sign the bill, which was passed by the House in June and cleared the Senate by a 96-2 vote. Any differences the bills passed will be settled tonight and a final version is expected to be sent to the president. Congress has to move quickly because it is scheduled to adjourn tomorrow.

The White House contends that the moratorium will halt the nation's thousands of taxing jurisdictions from squelching the budding e-commerce industry's revenues. But the more than year-long debate over the bill was hard fought with local leaders initially opposing it because they said it hindered their right to raise local revenues.

"Internet users and businesses should not be singled out for special taxes," Sen. Ron Wyden (D-Oregon), who introduced the bill along with Rep. Chris Cox (R-California), said today. "The Senate made it clear that we support the millions of people who use the Internet, and recognize that this is the business infrastructure of the 21st century."

During the nationwide tax ban, state, local, and federal leaders will scramble to set up uniform definitions for online goods and services to determine when and if they can be taxed.

The Senate bill also establishes a 19-member commission to recommend online tax policy. The body would file recommendations to Congress in 18 months and study the effect of e-commerce on brick-and-mortar retail businesses and local governments' ability to collect the appropriate taxes on Net sales.

Until then, the bill prevents "discriminatory" taxation of online goods, services, or information if those products are not taxed when sold through other distribution mechanisms.

Online vendors also can't be saddled with tax collection duties unless offline sellers face the same requirements. And Net access providers can't be singled out and hit with new taxes on the shipment of digital information--known as a "bit" tax--unless telecommunications companies, for example, face the same charges.

However, if a locality already is collecting taxes on Net access and services--the moratorium won't apply under a provision passed by both houses.

Drawn up as a concession for local leaders, the "grandfather" clause protects taxes enacted and imposed by states before March 1, 1998, in the House bill and October 1, 1998, in the Senate bill. Opponents of the clause worry that states and localities will apply old tax codes--for telecommunications or utilities, for example--to Net services during the time-out. Under the House bill, however, a state would have to reratify any such tax, opening the levy up to public debate.

The time-out doesn't apply to sales taxes on foods and services sold over the Net. Under most tax codes, if a retailer has a physical location in a state or city, it has to collect and remit sales taxes to the appropriate authorities; this is called having "nexus."

This rule cuts costs and burdens for remote vendors, including many shops on the Net. For example, the online bookseller Amazon.com is located in Washington state, so it only has to collect sales taxes from residents there.

Contention today surrounded an amendment to clarify "nexus." The amendment that passed states that the location of an ISP's or Web site's servers--and the simple fact that Web sites can be accessed in any state--does not constitute "nexus."

There are other exemptions to the moratorium as well.

Commercial Web sites that give minors access to "harmful" material could face new taxes under a provision added yesterday. Sen. Dan Coats's (R-Indiana) amendment exempts an array of sites from the moratorium unless they check the identification of visitors.

The proposal attempts to lay out an economic disincentive for sites that give underage Net users access to any communication, image, or writing that contains nudity, actual or simulated sex, or that "lacks serious literary, artistic, political, or scientific" value. The provision also requires Net access providers to offer customers products to screen out this material, or they also will be exempt from the moratorium.

Other Net-related legislation also was tacked on to the Net Tax Freedom Act.

Amendments passed Friday lay out online privacy protections for children and requirements to put government documents on the Net.

However, the Senate never considered a rumored amendment that Majority Leader Trent Lott (R-Mississippi) was said to be working on behind the scenes to reverse Congress's decision in May to retroactively approve up to $60 million in taxes that were collected in Internet domain name registration fees.

 

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