House Votes to Protect Internet From New Taxes Until 2006

The House voted overwhelmingly Wednesday to block any new taxes targeting the Internet through 2006, brushing aside opposition from local tax authorities and conventional retailers who fear a massive loss of sales to the burgeoning “new economy.”

The bill would extend for five years an existing moratorium on Internet access fees and other new taxes. But it leaves unresolved one of the thorniest questions in the electronic economy: how existing state sales taxes apply to Internet commerce.

Some critics of the bill, including President Clinton, called for a shorter extension of the moratorium. They argued that a five-year bill would undercut pressure for government and business to act any time soon on outstanding e-commerce issues, including the difficulty of enforcing the existing sales taxes on Internet transactions.

In a strong expression of those qualms, an amendment to extend the moratorium only two years failed narrowly, 219 to 208.

But then, in a sign of the high-technology industry’s growing political clout, the final vote on the five-year extension was 352 to 75, with 142 Democrats joining 209 Republicans and one independent in supporting the measure. That lopsided bipartisan vote underscored the pitched battle between the parties to win the favor of an industry whose political allegiance is up for grabs.

Indeed, the tax-moratorium bill is part of a concerted Republican drive to appeal to the high-tech sector with a flurry of action this month on industry priorities. These include an increase in limits on visas for high-tech workers from other countries, a repeal of the telephone excise tax and normal trade status for China.

Although many Democrats support those measures, Republicans are trying to put the GOP stamp on an agenda that they have dubbed the eContract2000--a knockoff of the “contract with America” campaign manifesto that the party rode to success in the mid-1990s.

“We Republicans are very proud to stand here and support the technology industry,” said Rep. David Dreier (R-San Dimas). “Why? Because the Republican Party stands for freedom, economic growth and getting the government out of the way.”

Indicative of the GOP’s desire to align itself with the interests of high-tech, House Republican leaders pushed the tax moratorium to a vote, even though the current law does not expire until October 2001.

Still, the bill apparently will face tougher sledding in the Senate. The Senate Commerce Committee had planned to approve a five-year moratorium extension last month but canceled the meeting because of opposition from state officials and retailers.

Sen. John McCain (R-Ariz.), the committee’s chairman, not only supports the five-year extension but has called for making the moratorium permanent. But foes of the extension also have allies on the panel, and a hearing on the measure has not yet been rescheduled.

The 10 States Allowed to Tax May Lose Right

The current moratorium, established in 1998, prohibits states and localities from imposing any new taxes on access to the Internet and from imposing any other kind of tax that applies only to the Internet. The 1998 law provided an exemption for 10 states--California is not one of them--that already had imposed taxes on Internet access. The bill the House passed Wednesday would eliminate the 10-state exemption.

Proponents said that the extension was necessary to avoid stifling the spectacular growth of the electronic economy.

“No one put a ship tax on Magellan,” said Rep. Rick Lazio (R-N.Y.). “No one put a mule tax on Lewis and Clark. We don’t know where the high-tech roller coaster will take us all next. All we can do is hold on and enjoy the fabulous ride.”

Some lawmakers, including Rep. Christopher Cox (R-Newport Beach), argued that the tax ban should be permanent. But an amendment to do so was defeated, 336 to 90.

The moratorium does not address the question of how sales taxes apply to Internet commerce, but many lawmakers said they fear that the five-year extension would put on hold all discussion of that issue. They expressed concern that, when the extension would expire in 2006, so many economic interests would be vested in a system with sharply limited sales taxes that it would be impossible to change.

Under current law, Internet retailers--such as mail-order companies--charge sales tax only on customers who live in states where the companies have a physical presence. Other customers are supposed to voluntarily pay sales tax to their home states, but in practice compliance is low and enforcement difficult.

State and local officials and traditional retailers argue that they will suffer significant revenue losses unless a way is found to impose on Internet retailers the same sales tax requirements that exist for more standard sales venues.

But proponents of the moratorium extension say that the bill does nothing to keep states from addressing the sales tax issue. In the meantime, Cox argued, the moratorium extension means “people can wake up and know there is not a government effort to shake down the Net.”

Only six members of the 52-member California delegation voted against the five-year extension, all Democrats: Gary A. Condit of Ceres, Barbara Lee of Oakland, Robert T. Matsui of Sacramento, George Miller of Martinez, Lucille Roybal-Allard of Los Angeles and Pete Stark of Hayward. Rep. Tom Campbell (R-San Jose) did not vote.

While Republicans load up their election-year agenda with e-commerce legislation, Democrats are making a similar bid to woo high-tech support. House Minority Leader Richard A. Gephardt (D-Mo.) gave a major speech in March depicting his party as sympathetic to the industry’s interests and supportive of various tax breaks that benefit it.

“The best and quickest way to kill the golden goose of the Internet is to tax it to death,” Gephardt said.

Democrats Face Competing Allegiances

But Democrats face a dilemma as they make this pitch. One of the industry’s highest legislative priorities is the pending bill to grant normal trade relations to China on a permanent basis--a policy bitterly opposed by the labor unions that are a key part of the party’s political base. Gephardt, for instance, announced his opposition to the China trade bill shortly after his high-tech speech.

According to an analysis of campaign donations by the nonpartisan Center for Responsive Politics, the two parties so far have fought nearly to a draw in the high-tech money chase. Based on recent data from the Federal Election Commission, the center calculated that Republicans had collected $6.2 million from computer-related industry sources so far in the 1999-2000 campaign cycle. Democrats received $6.7 million.

“Both parties are trying to court this industry,” said Holly Bailey, an analyst at the center. “It’s like a high school dance where you have the quarterback on one side of the gym and the captain of the basketball team on the other and the computer industry is trying to decide between them.”