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November 5, 1997

Senate Panel Supports Ban on Internet Taxes

By JERI CLAUSING Bio
 WASHINGTON — A key Senate committee on Tuesday endorsed a plan to protect the Internet from state and local taxes, but the head of the panel promised another hearing on the still somewhat vague and controversial plan before it goes to the Senate floor.


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The plan, the Internet Tax Freedom Act, cleared the Senate Commerce, Science and Transportation Committee on a 14-to-5 vote, despite pleas from state governors, legislatures, mayors and cities to give the matter further study.

"The Internet will be the business infrastructure of the 21st Century," said Senator Ron Wyden, an Oregon Democrat who is the bill's chief sponsor. "To subject it to as many as 30,000 taxing jurisdictions applying different rules of taxation would be a mistake."

Wyden said he had made more than 20 changes to the bill since it was introduced in early summer to address concerns by state and local taxing authorities, which are seeking to raise revenues from the fast-growing Internet industry. He said the bill now specifically protects the right of localities and states to collect taxes likes sales, income and property taxes from companies that do business on the Internet, but it precludes them from levying special taxes aimed at Internet transmissions and network services.

But opponents say the bill still fails to clearly specify what Internet-oriented activities are being targeted, and that it has the potential to invalidate some taxes like Texas's corporate franchise tax, which takes the place of a corporate income tax.

"I am very concerned. I do not think this bill is ready to go to the floor," said Senator Kay Bailey Hutchison, a Texas Republican. "I don't think he has covered all the situations enough. This could cost my state $1 billion if one of these companies challenged our ability to impose the franchise tax."
“The future of the American rests too much on [Internet commerce] for us to choke this baby in its cradle.”

Senator John McCain

Senator Byron L. Dorgan, a North Dakota Democrat, said he was opposing the bill because no one could tell him what unfair taxes are now being applied and exactly what taxes would be pre-empted under the bill.

"We are dealing with some serious tax issues here," he said.

John McCain, the Arizona Republican who is the committee's chairman, urged support, promising another hearing on the bill.

"The future of the American rests too much on [Internet commerce] for us to choke this baby in the its cradle," McCain said. "This is a serious issue we need to move forward on."

Supporters won over one other opponent, Ted Stevens, an Alaska Republican, who is concerned that Internet service providers are exempt from definition as telecommunications companies, meaning they do not have to contribute to the Universal Service Fund created by the 1996 Telecommunications Act to make sure remote areas get modern service at a rate comparable to urban areas.

Stevens agreed to support the bill after winning language in a budget bill requiring a study on whether Internet providers should be brought into the fund, which is regulated by the Federal Communications Commission.

"I am still worried that where I come from will have dial phones in the year 2015 when everyone has voice-activated systems," Stevens said. "I do not want the Internet to become a special class of messages immune from any controls to ensure a level playing field"

"But I will not fight this bill, he said, adding, "but I reserve the opportunity to offer amendments on the floor."

The bill approved by the Senate committee does include the words "telecommunications facilities" in its definition of the Internet, which did make Internet industry lobbyists uncomfortable.

"We are concerned that that's a slippery slope," said Jon Englund of the Information Technology Association of America. "We're concerned that that could slide into the FCC notion of how it applies to the Universal Service Fund."

The bill would declare a moratorium on any state or local taxes specifically directed at Internet use or electronic commerce for five years while the administration conducts a study on tax implications.

Local governments still would be allowed to collect taxes from companies doing business on the Internet as long as the taxes are applied in a "technologically neutral way,'' Wyden said.

A similar bill has been endorsed by two House subcommittees, and the Clinton Administration has called for a tax-free Internet, where business dealings could rise to as much as $150 billion in the next few years by some estimates.

Connecticut, Massachusetts, Tennessee, Pennsylvania, Texas, Ohio and Wisconsin currently tax some Internet services, according to a New York State Tax Department study released earlier this year.

The National Governors' Association, the National Conference of State Legislatures and the National League of Cities are among the critics leading the charge against the moratorium.

Mark Schwartz, an Oklahoma City Councilman who is the president of the National League of Cities, has described the legislation as "offensive'' to local governments.

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Jeri Clausing at jeri@nytimes.com welcomes your comments and suggestions.


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