Post-Moratorium Access Taxes Feared

A last-minute rush to ram through legislation extending a national moratorium against cyberspace taxes failed in the Senate, opening the doors for states to impose taxes on online access.

WASHINGTON, D.C. -- A last-minute rush to ram through legislation extending a national moratorium against cyberspace taxes failed in the Senate, opening the doors for states to impose taxes on online access.

A three-year moratorium on Internet taxes, passed by Congress in 1998, expires on Sunday. The House of Representatives passed a two-year extension of the moratorium this week, but the measure died in the Senate Thursday when Sen. Byron Dorgan, D-N.D., opposed an attempt to pass a similar bill, which would have then been sent to President George W. Bushs desk for signing.

In the Senate, quick passage of bills can die through the efforts of a single senator. In this case, the bill was on an expedited "unanimous consent" track. Dorgan voted no and effectively derailed the legislation.

Harris Miller, executive director of the Information Technology Association of America, said if Congress fails to extend the moratorium, states will likely start imposing taxes on access, which will hurt the economy by keeping some shoppers off the Internet. In addition, businesses with multiple Internet connections could suddenly see their bills balloon as every point of access was taxed.

"I dont know why Senator Dorgan is setting himself up as an enemy of the Internet," Miller said. "You cant say we want more e-commerce and more e-government, but were going to take the on-ramp to the Net and put special tolls on it, on top of the tolls you pay already for basic telecommunications services. You cant have it both ways."

Dorgan has long fought to give states the rights to wring more tax revenue from cyberspace, be it through electronic commerce sales taxes or levies placed on Internet access fees. Only a few states taxed Internet access before the moratorium was passed. The moratorium did not effect sales taxes, because most online sales, technically, are subject to taxes. But, the U.S. Supreme Court has twice ruled that states cannot force out-of-state retailers to collect sales taxes for them for remote sales -- when, for example, a consumer in Pennsylvania buys a book from in Washington State. Thats left the entire issue in limbo.

Passage of the extension, however, became linked to the sales tax issue. Dorgan and other lawmakers said they would not endorse extending the moratorium on access taxes if Congress did not give states a way to collect taxes on purchases made by citizens through catalogs or the Internet.

The complicated issue, which was bogged down on Capitol Hill prior to the Sept. 11 terrorist attacks, has been put on the back burner while Congress now focuses on national security. At this point a compromise looks doubtful. Speaker of the House Dennis Hastert, R-Ill., said hes unwilling to alter the House bill much.

"Were in a protracted fight if the two-year bill doesnt go through, a long fight," said Stan Sokul, a Washington, D.C., attorney who lobbies for Internet businesses on the Internet tax issue.

Frank Shafroth, director of state-federal relations for the National Governors Association, applauded the Senates derailment of the moratorium. While he predicted that no states are now poised to push through legislation taxing online access, he did say the subject would likely be on the agendas of many states eventually. The faltering economy, which already has dramatically shrunk many state coffers, combined with the need for states to spend more money protecting their citizens from terrorists, will make all potential sources of revenue targets

"Im sure as governors and mayors say, 'I want an option of cuts I can make and revenues I can get, to help protect people from terrorists, this will appear on a list," Shafroth said.