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Five-year extension of Internet tax moratorium clears House

WASHINGTON — Computer users could surf without fear of taxes that single out the Internet for five more years under legislation passed by the House, part of a broader Republican agenda aimed at appealing to the high-tech industry.

Other priority issues include repealing the 102-year-old 3 percent telephone excise tax, increasing visas for highly skilled foreign workers and granting digital signatures the force of law.

"The high-tech industry is the future,'' said House Speaker Dennis Hastert, R-Ill. "The last thing we want to do is impede our future with high taxes and excessive government regulation.''

The bill is designed to prevent states from taxing access to the Internet, such as requiring computer users to pay taxes on their America Online accounts. It also would bar new taxes aimed specifically at online activity, such as the amount of time a user spends on the Internet or how much material a user downloads.

Additionally, the bill would repeal a grandfather clause enacted that allowed the states of Connecticut, Montana, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington and Wisconsin and 16 cities to keep taxes they had in place at the time.

Without the moratorium extension and repeal of the grandfather clause, thousands of state, county and local taxing bureaucrats could slow down Internet growth and "drown the whole thing in a sea of red tape,'' said Rep. Christopher Cox, R-Calif.

"Don't pile new taxes on the Internet,'' he said.

Industry groups applauded the vote.

"E-commerce is barely in its infancy and a rush to impose government levies could stifle its growth and development,'' said Dorothy Coleman, tax policy vice president at the National Association of Manufacturers.

Opposing the five-year extension are state and local government officials, including 39 governors worried about future revenue losses for services ranging from roads to schools. Also against the bill are many traditional retailers, including big chains like Wal-Mart and Sears, that fear Internet competitors will gain an unfair advantage due solely to tax laws.

The moratorium doesn't directly address sales taxes. However, under a Supreme Court ruling, states can't collect them from remote sellers -- such as an Internet or catalog business -- unless the company has a physical presence such as a warehouse or store in that state. The moratorium extension, opponents say, would effectively put those central issues on the back burner for far too long.

"These issues will not go away,'' said Rep. Jerrold Nadler, D-N.Y. "State and local governments will need clear rules on what they can and cannot tax.''

The White House issued a statement opposing the five-year extension, saying it would "in effect enact a hold on any further consideration of Internet tax issues, creating uncertainty in a vital and rapidly growing industry.''

But Rep. Robert Goodlatte, R-Va., said the moratorium "has absolutely nothing to do with the sales tax. We will have the opportunity to have that debate.''

The House voted 219-208 to defeat an amendment supported by the White House that would have extended the tax moratorium for only two years and kept the grandfather clause for some state and local taxes. Another amendment that would have made the tax moratorium a permanent ban also was defeated by a 336-90 vote.

The five-year tax moratorium measure now heads to the Senate, where it faces an uncertain future. Senate Commerce Committee Chairman John McCain, R-Ariz., put off consideration of his permanent Internet tax ban bill after it encountered stiff opposition last month.

"We've been looking at a three-year extension,'' said Senate Majority Leader Trent Lott, R-Miss. "But it's not scheduled right now.''

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