Congress renews Net tax debate

Bills being kicked around the Senate are pitting the interests of local governments and retailers against those who want the Internet to be a permanently tax-free zone.

In October, a moratorium on new Web sales taxes expires. If the moratorium terminates without new regulations to replace it, states, cities and other local entities will be free to add their own tariffs on Web transactions. The temporary tax ban, which first went into effect in 1998, provided a three-year period to study the issue.

But even the members of the official committee charged with studying Web taxation couldn't reach a formal agreement to submit to Congress last year, illustrating how divisive the issue can be. The Advisory Commission on Electronic Commerce disbanded last spring without the two-thirds vote necessary for an official recommendation to federal lawmakers.

Lobbyists say they don't think the issue will be resolved quickly this time, either. Many say they believe some sort of Internet taxation bill will pass eventually, partly because of the deadline and also because no lawmaker wants to run for re-election next year as the candidate who taxed the Internet. On the other hand, the dot-com bust has caused many e-tailers to close shop, meaning legislators might not be as eager to address Internet-related issues as they have been in the past.

Regardless, the shape of the tax legislation is still undetermined.

The latest talks could lead to a compromise measure that may be introduced as early as next week, according to the National Governors Association, which has fought measures to permanently ban sales taxes. The compromise bill would extend the moratorium and require at least 25 states to submit a unified plan to Congress that would outline how they planned to simplify the process of potentially taxing Internet transactions.

However, during the compromise talks, lawmakers apparently have removed a description of the exact steps the states are required to take to prove they're simplifying the process.

"I'm a little worried," said Frank Shafroth, director of state federal relations for the National Governors Association. "It's sort of like being blindfolded. By doing this, they've left open a big way for Congress to say, 'Oh no, that's not what we meant by simplification.'"

One of the biggest complaints of local entities is not that they can't add taxes to Web transactions, but that mechanisms to collect current taxes are difficult. The groups are hoping that a compromise bill would include provisions that would make it easier for them to collect any taxes currently charged.

A spokesman for Byron Dorgan, D-N.D., a sponsor of one of the major tax bills, said negotiations on a final compromise version, which would cull from Dorgan's bill and others, are "getting close but not there yet." The spokesman said hearings on the issue could begin soon. He also said that Fritz Hollings, D-S.C., the new chairman of the Commerce Committee, which is considering some of the bills, has indicated that he expects to mark up a compromise measure within the month.

Coy Knobel, a spokesman for Sen. Mike Enzi, R-Wyo., who's co-sponsoring Dorgan's bill, said the change in leadership has sparked renewed interest in the legislation.

USA Today reported last week that a compromise had been reached that would lengthen the moratorium to 2006 but allow local governments to collect taxes; however, staffers disagreed with the report.

"We're still trying to get the different interested parties together," Knobel said. "We're working hard to get some sort of compromise that's acceptable to different people."

Knobel said that the senator has spoken with the vice president about the issue but the White House has not taken an official position.

Dorgan's own proposal would extend the moratorium for another four years to give states the chance to simplify their tax schemes by following a series of specific steps. The measure is backed by brick-and-mortar retailers, which worry that e-tailers would have an advantage in a tax-free world. Other supporters include groups representing local governments, which fear losing revenue as more transactions are done online. The bill has 10 sponsors

Meanwhile, Sen. Ron Wyden, D-Ore., is sponsoring a competing bill that would extend the moratorium for five years and permanently ban any Internet access taxes. His bill is backed by e-commerce companies, which want to avoid additional taxes tacked on by local governments. His bill also would eliminate a grandfather clause that allows the handful of governments currently applying taxes to continue to do so.

Another bill would extend the moratorium permanently.

Similar bills are moving through the House. But some lobbyists don't think anything will happen this session.

"There are some bigger things that are happening that are much more important to the broader American constituency," said Ben Isaacson, executive director of the Association for Interactive Media, which has opposed Internet taxes.

He said legislators are more concerned with the education bill and other issues. In addition, he said the negotiations on Internet taxes could drag out as special interest groups try to tack on pet projects onto the measure, much as they do with appropriations bills that must pass by certain deadline.

Staff writer Margaret Kane contributed to this report.