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Analysis: Internet Tax Ban

Dateline: 05/10/00

H.R. 3709, the Internet Tax Moratorium bill would extend for five years the three-year moratorium on Internet taxation imposed by the Internet Tax Freedom Act of 1998, signed by President Clinton on Oct. 21, 1998. Who stands where, and why?

In 1998, the Tax Freedom Act of 1998 became law and imposed a three-year moratorium, or temporary ban, on the imposition of  any new taxes on access and e-commerce uses of the Internet. The existing tax moratorium expires on Oct. 21, 2001. H.R. 3709, as currently amended, would extend the moratorium through Oct. 21, 2006 in order to allow Congress more time to study the overall question of Internet taxation.

The current moratorium bans the creation of taxes on Internet access and use (i.e. monthly fees paid to America Online, CompuServe, Erol's, or other similar services to access the Internet, email and file downloads), and taxes on sales made over the Internet.

While there is little opposition in House to continuing the moratorium on taxing Internet access, or even banning it altogether, there is certainly disagreement on the issue of taxing sales made over the Intenet.

Opinion on the Internet sales tax portion of H.R. 3709 does not follow strict party lines in the House. Instead, it varies from state-to-state.

The States' Considerations
The states' would want a law clearly stating the their latitude to impose and collect taxes on Internet access and sales. 

Eleven states already imposed a tax on Internet access fees when the Internet Tax Freedom Act of 1998 went into effect. The Internet Tax Freedom Act of 1998 included a "grandfather" clause allowing those states to continue collecting this tax. H.R. 3709, if adopted, would remove this grandfather clause, thus requiring those states to stop collecting Internet access tax resulting in a substantial loss of revenue. These 11 states obviously oppose the extension of the tax moratorium.

In spite of the potential revenue from taxing online sales, state governors remain divided on the issue. 

While collecting Internet sales tax appeals to states with economies dependent on sales taxes, it could hurt those states with massive Internet-based economies already in place.

California's Democratic Gov. Gray Davis, for example has told the press, "In the short term, I do not favor the application of the sales tax for the Internet, because I certainly don't want to kill the golden goose that is laying the egg." (Also See: Internet Sales Tax: Clinton & Governors Talk)

While some states oppose any moratorium on Internet taxation, others prefer a shorter duration ban than the five years in H.R. 3709. These opponents feel that by the end of a five-year moratorium on Internet sales tax, it would be politically impossible to pass a law allowing them.

Consumers' Considerations
If the Internet tax moratorium is not extended, what sort of Internet taxes could legally be applied starting Oct. 21, 2001 -- the end of the current moratorium applied by the Internet Tax Freedom Act of 1998?

Taxes could be applied to your Internet access fees. For example, a tax could be applied to your monthly AOL or Internet service provider (ISP) charge. Once again, Internet access is already taxed in 11 states.

Access taxes could also be applied to email, file downloading and any other activity resulting in a permanent exchange of data. 

In addition, taxes could be added to any sales or other types of commerce conducted over the Internet.

The Administration's Considerations
Considering its long standing and well publicized support for bridging the "digital divide" by making the Internet available to persons of all economic levels, it is hard for the Clinton Administration to oppose a permanent ban on Internet access taxes. (Also See: Spending to Bridge the 'Digital Divide')

When it comes to Internet sales tax, White House spokesman Joe Lockhart has stated that President Clinton wants the states to resolve the issue among themselves. "He believes that it may have to involve some simplification of sales tax. But this is something they (the states) will have to work out with some urgency as we move forward," stated Lockhart following a Feb. 28, 2000 meeting on the issue between the President and U.S. Governors.

Reference Links

Protecting the Internet from Taxation
Material in support of preventing taxation of Internet access or commerce from Rep. Chris Cox (R-CA).

House Debates Internet Tax Freeze
The House starts debate on a bill to extend the current 3-year moratorium in Internet taxes for another five years. From your About.com Guide.

Internet Sales Tax: Clinton, Governors Talk
President Clinton and the U.S. Governors held a face-to-face chat about the Internet yesterday in Washington. The topic of the day was whether states should collect taxes on Internet sales. From your About.com Guide.

Spending to Bridge the 'Digital Divide'
President Clinton's Fiscal Year 2000 Budget Proposal to Congress includes a multi-billion dollar spending plan designed to extend Internet access to poor Americans and minorities. From your About.com Guide.

Candidates and Taxes
Where the presidential candidates stand on Internet tax and taxes in general. Compiled by U.S. Politics Guide John Aravosis.

Politicians Should Not Tax the Internet
$36 million in online holiday gift orders supports 'tax-free' argument. From Libertarianism Guide Alexis Nepomuceno.

Internet Taxation Net Resources
Links on Internet/E-commerce Taxation, from Tax Planning U.S. Guide Shellie L. Moore.

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