Capitol Hill got busy last week celebrating the fifth anniversary of the 1996 Telecom Act. In honor of the event, a bipartisan crop of congressmen reintroduced a cluster of old bills disguised as extensions of our current Internet sales tax moratorium.

by Patricia Fusco ISP-Planet Managing Editor [February 14 , 2001]

The original three year suspension of lawmaker’s rights to tax the Net is set to expire this October. With the life span of the e-tax moratorium about to end, the House and Senate are in a hurry to finalize bills sanctioning various sales taxes on Web transactions.

And the ban played on
The first so-called tax ban hit the floor on Feb. 6, when Sen. Bob Smith (R-NH) introduced S.245, a proposal to prohibit all federal Internet sales taxes ad infinitum.

Of course the U.S. Government does not have the constitutional right to levy sales taxes of any type—online or off—only states and localities can legally tax sales made in this country. Should the bill become law, it would not stop the federal government from placing tariffs Internet access fees. S.245 would, however, open the door for the Federal Communications Commission to apply e-rate taxes on Internet access fees.

So S.245 is not an e-tax banning piece of legislation, it’s the first step in a legal procedure that would allow federal agencies to collect e-rate funds from America's online populace, as gathered by Internet service providers.

By the way, an ordinance that would remove the e-rate cap has already been woven into the fabric of current federal budget plans. Look out e-rate, here we come.

A second bill was introduced in tandem with S.245. Duly dubbed S.246, this legislation would extend the life of our current Internet tax moratorium for another five years. But this initiative quickly lost favor on Capitol Hill when Sen. Ron Wyden (D-OR) and Rep. Christopher Cox took the floor on Feb. 8 and extended elements of S. 245 and S.246 to include a method for states to coordinate Net sales tax legislation.

Partial toward Net taxes
The two proposals that received all the attention in Washington, D.C. last week are collectively called the Internet Non-Discrimination Act. This Net-taxing tandem was also introduced as couple of companion bills.

Much like legislative proposals S.245 and S.246, Sen. Wyden's Internet Tax Freedom Act, one part of the INDA, would permanently ban Internet access taxes and extend the current sales tax moratorium another five years, but that's where the similarities end.

The INDA legislation is designed to streamline the way state authorities could collect sales taxes from online transactions. The so called ITFA does not emancipate online consumers from paying sales taxes. The Act does, however, allow states to bag a bundle of bucks from assessing sales taxes on Web transactions.

A congressional study in July estimated that states and localities would lose $300 million to $3.8 billion in tax revenue in 2000 due to tax-free purchases made over the Internet.

Congress is attempting to barter a four-handed e-tax deal between the state lawmakers, Internet users, online and conventional retailers:

• States and localities fear they will lose vital sales tax revenues as businesses sales shift toward online processing.
• E-commerce companies insist that it would be impossible for online businesses to comply with thousands of local sale taxes.
• Bricks 'n mortar store owners argue that allowing the Net to operate as a duty-free zone is unfair and sales taxes must be applied equally in order to level the playing field.
• Internet users know that they will be paying for whatever Congress decides.

Last month, a coalition of U.S. states unanimously approved a plan to simplify their sales tax codes, with an eye toward eventually capturing revenue from Internet sales. The development allowed Sen. Wyden and Rep. Cox to craft legislation that presumes Capitol Hill would coordinate states' Net sales tax legislation.

Lawmakers deception
The only discriminating feature of the bill is that it would prohibit state and local authorities from instituting multiple sales taxes on the same online transaction. For example, let's say right now you live in Connecticut and like to buy wine online from a California-based e-tailer. You are not taxed on the purchase of the fermented juice or the shipping and handling fees incurred for delivery of the full-bodied beverages.

The Internet Non-Discrimination Act would change all that. If you live in Connecticut and buy wine online from Napa Valley you would have to pay CT state sales tax on the purchase—about 6 percent of the sale. You would not have to pay taxes on the shipping and handling fees. Of course, you are going to be paying e-rate taxes on your Internet access that initiated the online sale in the first place, and the Californian wine maker will have to pay corporate taxes on the total transaction.

But these levies are not considered sales taxes, so the federal government doesn't acknowledge that online transactions would yield multiple layers of taxes. As a matter of fact, this is what U.S. Lawmakers perception of Internet Tax Freedom.

E-tax injustice
The reason why states have the right to levy offline sales surcharges is to support the state-owned infrastructure provided to transport the general public to retail outlets—streets, roads and highways, and to fund guardians that protect and serve the general publics interests—police, fire, and emergency services.

The reason why states would have any right to tax online sales is because vehicles still have to traverse public pathways to deliver the goods to your door. However, the state does not pay for the transport of the general public to virtual e-commerce outlets on the Web—Internet services provide the infrastructure.

So the only portion of an online sales transaction that states could rightfully tax are delivery fees. Ironically, in our Web wine example, we clearly illustrated that delivery fees were the only element of the online sales transaction that Connecticut did not tax.

Now, isn't that discriminatory?

Should the Internet Non-Distrimination Act become law, Congress would become nothing more than a Net tax clearinghouse capable of approving or rejecting states’ e-tax plans without alteration.

Congress is wholly prepared to work on an expedited basis to codify the new state sales tax system and the bills reportedly have the support of President George W. Bush.

Indeed, on the fifth anniversary of 1996 Telecom Act U.S. Lawmakers passed on the opportunity to provide safe-conduct for online sales transactions and make the Internet a global duty-free zone. Instead, Capitol Hill armed state legislators with a collection of tax tools poised to levy a load on American online consumers.

The current collection of e-tax bills on lawmakers dockets are markedly unjust, deliberately partial, and downright deceptive. Plus ça change, plus c'est la même chose—the more that changes, the more it stays the same.

— End