Senate Approves 3-Year Ban on New Internet Taxation

Paving the way for the nation’s burgeoning electronic marketplace to rocket to new heights, the Senate approved a bill Thursday that bars cities and states from imposing new taxes on Internet commerce for the next three years.

The measure creates an advantage for online shopping services over traditional retailers, who still must charge their customers local sales taxes.

The controversial Internet Tax Freedom Act, which also imposes a three-year moratorium on taxing the fees people pay to gain access to the Internet and establishes a panel to find a permanent solution to the taxing of electronic commerce, passed on a 96-2 vote.

Sponsors of the measure hope the House, which has approved its own, slightly different moratorium on new Internet taxes, will agree to send the Senate version on to the White House. President Clinton is expected to sign the measure.

“We cannot allow 30,000 state and local tax jurisdictions to stifle the Internet, nor can we allow the erosion of the revenue that state and local governments need,” the president said.

The Senate’s near-unanimous vote camouflaged a fierce, last-minute battle over how Congress might best protect the rights of state and local jurisdictions to levy taxes and not put local retail businesses at a financial disadvantage to their counterparts in cyberspace.

Local tax authorities had bitterly opposed the bill because they feared the loss of billions of dollars in revenue to Internet service providers and online businesses like Dell Computer and bookseller Amazon.com.

Companies such as America Online and Microsoft have supported the measure, hoping to prevent a patchwork of taxes from choking off Internet commerce before it has a chance to bloom.

Supporters of the tax moratorium cited the actions of more than a dozen states that have already imposed taxes on Internet access and transfers of data.

“We need a moratorium on taxes for people to feel confident about engaging in electronic commerce,” said Michael Putnam, an analyst at Forrester Research in Cambridge, Mass. The firm says that today’s estimated $7-billion market in electronic commerce could explode to more than $300 billion by 2003. “This market could eventually have a significant impact on the nation’s economy,” Putnam said.

The Internet Tax Freedom Act gained the grudging support of state and local tax authorities at the eleventh hour, after lawmakers agreed to grandfather existing sales taxes and allow a 19-member study group of local, state and federal officials to examine the out-of-state tax question. That issue has vexed local taxing authorities since the Supreme Court ruled in 1992 that a state cannot force a business outside its borders to collect a sales tax unless the firm has an office, warehouse or some other physical presence within the state seeking to tax.