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Congress Considers Bill to Permanently
Extend New Internet Tax Ban

By Curt Anderson   Associated Press
WASHINGTON — Congress may not settle the issue of how state sales taxes should apply to electronic commerce, but there's broad support for legislation permanently banning new state or local taxes that single out the Internet.

The bill's main sponsors, Sen. Ron Wyden, D-Ore., and Rep. Christopher Cox, R-Calif., said people on both sides of the sales tax debate agree the current three-year ban on new Internet taxes should be extended indefinitely.

"Our bill simply says you can't stick it to the online world," Wyden said Thursday. "We shouldn't discriminate against the most vibrant part of the economy."

The law enacting the temporary ban, which expires in October 2001, also created a congressional commission to recommend future tax policy for the Internet. Its report is due in April, and both Wyden and Cox said they expected one recommendation would be an extension of the ban on new taxes.

"The current hands-off tax policy is working," Cox said.

It is unlikely, however, that the advisory panel will reach consensus on how existing state sales taxes are collected from Internet purchases. Even if it did, Congress is reluctant in an election year to try to overturn a Supreme Court decision requiring a remote seller — catalog, Internet or otherwise — to have a physical presence in a state before that state can force it to collect and remit sales taxes.

Some — not all — Internet merchants charge sales tax to their electronic customers, but there is widespread confusion over which businesses must charge which customers, and some states believe they are not receiving all the tax revenue they are entitled to receive.

In testimony this week to Congress, Michigan Gov. John Engler, like most governors a proponent of a new system to collect sales taxes from the Internet, agreed that other taxes should be banned on such things as Internet access.

"We should not impose new surcharges or access fees to this emerging technology," Engler, a Republican, told the Senate Budget Committee.

Several members of Congress are pushing a bill that would also permanently ban states from imposing sales taxes on e-commerce — a position central to the presidential campaign of Sen. John McCain, R-Ariz. — but other lawmakers prefer waiting until there is conclusive evidence about the Internet's impact on state government revenue. The sales tax now accounts for about $150 billion in revenue to states, about two-thirds of their total take.

"What if they find that their revenue sources are coming up short?" said Sen. Pete Domenici, R-N.M. "This hasn't happened yet, but if it does either other forms of state and local taxation will be needed, services will be reduced, or demands will be placed back on the federal government to make up the shortfall."

Congress may consider other Internet tax measures this year, including:

—Repeal of the 3 percent telephone excise tax, initially created to help finance the Spanish-American War and now seen by many as an extra cost that can hinder Internet access.

—Putting into law the Supreme Court decision, known as Quill, that governs remote sales and sales taxes. This would effectively maintain the tax status quo for e-commerce and catalog sales, and it could be done temporarily in case state revenues do start to erode.

—Defining exactly what the Supreme Court meant by "nexus" in that Quill case — the requirement that a business have a physical presence in a state before that state can collect its sales tax. The Internet raises numerous questions about what that means, such as how to treat a Web page, the location of a server or the location of an Internet provider.

"You can't stuff the new economy into a set of rules that were written for a smokestack economy," Wyden said.

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