Passage Seen for Bill to Halt Online Taxes

With President Clinton’s backing and strong bipartisan support in Congress, a bill to freeze new taxes on goods sold over the Internet is likely to pass next month, despite opposition from most of the nation’s governors.

“There should be no special breaks for the Internet, but we can’t allow unfair taxation to weigh it down and stunt the growth of the most promising new economic opportunity in decades,” Clinton said Thursday while attending the Technology 1998 conference here.

Likening his Silicon Valley visit to a presidential expedition to a Pennsylvania steel mill at the dawn of the Industrial Revolution, Clinton also announced a $23-million initiative to put U.S. cultural treasures--about 3 million items housed at the Smithsonian and the National Archives--online.

“At the dawn of a new century, the strength of our economy, the health and prosperity of our people--indeed the very security of our nation--will depend more than ever on the scientific and technological revolution,” Clinton said of the Internet. “This phenomenon has absolutely staggering possibilities to democratize, to empower, people all over the world.”

The Internet Tax Freedom Act, sponsored by California Rep. Christopher Cox (R-Newport Beach) and Sen. Ron Wyden (D-Ore.), calls for a six-year moratorium on new taxes while lawmakers and industry leaders study the complex new marketplace. The measure is intended to block state and local governments from imposing levies that would not apply to similar sales in stores and to prevent consumers from paying redundant taxes because of the many jurisdictions that can lay claim to a single Internet transaction.

The bill enjoys strong bipartisan support among the California congressional delegation and state legislators and is backed by Republican Gov. Pete Wilson. The vast majority of the nation’s governors, however, oppose the bill, fearing that it would create a tax-free shopping haven online and rob them of sales-tax revenue badly needed to fund schools and roads.

Cox and Wilson have said that the freeze is crucial as electronic commerce explodes from $8 billion last year to a projected $300 billion in 2002. Better to ward off unfair taxes now, they said, than to try to repeal a barrage of new levies down the road.

Cox said he is confident that the burgeoning marketplace ultimately will be a huge sales-tax boon for the states through sheer volume. “We ought not to kill the goose that’s laying the golden eggs,” he said.

Governors, though, are anxious to get their hands on the proceeds.

The National Governors’ Assn., which wrapped up a meeting earlier this week in Washington, suggested alternative legislation that would prevent states from taxing Internet access and force them to set just one sales tax rate for all online transactions, rather than allow rates to vary by locality.

While many governors worry that the Internet could steal business from Main Street stores because of lower taxes, Wilson is concerned about the opposite problem.

Consider an online customer who signs on to a terminal in Los Angeles using an Internet provider based in Virginia, orders a fruit basket from a Florida company to be sent to a friend in Ohio and pays for it with a credit card from a New York bank. If every state imposes sales tax, the customer could face a 25% to 30% add-on, rather than the single-digit taxes in most stores. It could end the online revolution before it gets off the ground.

“They need to be realistic,” Wilson said of his fellow governors.

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Wilgoren reported from Washington and Shogren reported from San Francisco.