Keep Your Hands Off the Net

U.S. lawmakers lobby to extend tax moratorium

Like the bear its become, the Internet tax issue is slowly coming out of the hibernation of its three-year moratorium and is facing the same old argument: To tax or not to tax?

The expiration date for the moratorium on any new Internet tax isnt until October, but members of Congress are already coming out of the woodwork to lobby for and against lifting the ban. In February, a bipartisan group of U.S. senators and representatives proposed legislation that would extend the moratorium on discriminatory Internet taxes for five more years.

Two weeks ago, the speaker of the House, Dennis Hastert, was joined by a handful of other House members at the opening of the Comdex trade show to speak about the ills that any new tax would impose on citizens. Regardless of its members views, however, one thing is clear: Congress has done very little since 1998 to plan for the moratoriums inevitable expiration—let alone further the discussion.

At Comdex, in Chicago, the handful of legislators participated in panel discussions on the Internet tax moratorium and online privacy. They used the forum to plead their cases for and against the moratorium and comment on what role the federal government should and could play with regard to making online communications more secure and safe.

The House members, who included Jerry Weller, R-Ill.; Bobby Rush, D-Ill.; Mark Kirk, R-Ill.; and Jim Moran, D-Va., were preceded by a speech by Hastert, R-Ill., in which he emphatically called for an extension to the moratorium.

"As you know, Congress originally enacted the moratorium to prevent thousands of state and local taxing jurisdictions from using the Internet as a cash cow," Hastert said in his speech. "Well, in October, the moratorium ends. Rather than slow down the Internet with a slew of new taxes, we must extend the moratorium and allow the Web to reach its full potential."

Following his speech, Hastert summed up his feelings, saying, "Were trying to find common-sense answers that protect consumers."

While that may be true, the Congress, as usual, is rife with opposing views.

"I think the moratorium needs to be permanently in place," Weller said, adding that consumers need only look at their utility bills "to see how creative" local governments can get with taxes.

Sitting beside Weller was Rush, whose district is in a low-income part of Chicago. A moratorium on Internet taxes, Rush said, will mean lost sales for the many very small businesses in his district that dont have the means to develop a Web presence or even the knowledge of what the Web could do for them.

"There are people, brick-and-mortar retailers, who say, Were paying taxes. We think its unfair. They should also have to pay sales taxes," Rush said in an interview following the panel discussion.

Rushs comments touch a sensitive nerve of the debate: Just where would new taxes land, and who would be required to collect and pay them?

And though Hastert implored, "Lets be clear. The Internet tax moratorium does not deal with sales taxes," so-called sales and use taxes undoubtedly surface during every Internet tax discussion.

The sales and use tax has existed for many years and puts the burden of paying sales and use taxes on the seller of goods and the consumer, respectively. And while the first deals with taxing producers of goods for the privilege of selling those goods, the latter "use" tax is what becomes murky in discussions about new Internet taxes.

It has been the obligation of a consumer to pay his or her state a use tax when he or she purchases a product from another state and has it shipped in. But since this is a state issue, there is no widespread or uniform method of collecting these taxes. As a result, in many states, these taxes go unpaid.

"In almost all the surveys Ive seen, consumers dont know theyre supposed to pay a use tax," said Bruce Hahn, director of public policy at the Computing Technology Industry Association, based in Arlington, Va.

Add Internet shopping to the mix and whether or not producers have manufacturing plants in states where products are purchased, and the use tax issue becomes exponentially more complex. And not merely for consumers but also for sellers, who, if a new Internet tax were crafted, would have to build the infrastructure to support it. Such an "infrastructure burden" would include not only the most sophisticated technology but also staffing and a host of other issues.

"Its a daunting task to do it for customers today that are in-state," said Joseph Wisniewski, a partner at Deloitte & Touche LLPs Tax Services group in Chicago and a panelist for the discussion. "Its a monumental task to do it [for state to state]."

And while Leslie Minkus said a permanent ban on new Internet taxes is unrealistic, the president and CEO of KDM Enterprises Ltd., of Hawthorn Woods, Ill., said consumers need to "just say No to new taxes."

In what seemed like a surrender of sorts, Hastert, a former champion wrestling coach, told the audience, "Your industry controls its own destiny. If you dont start to come up with those ideas," the industry will suffer the consequences of ignoring the problems.

He added, "Its better than Congress laying down the law. It may be an OK law for 2001." But Hastert warned that only the technology sector can plan adequately for the long-term growth of its own industry.