Originally created 02/26/97

Taxing the Internet

WASHINGTON - To hear Internet and technology executives talk, new state and local taxes rank up there with computer viruses and 14-year-old hackers as a threat to the global computer future.

"It defeats the purpose of seamless interstate commerce," argues Scott Cooper, technology director at the American Electronics Association. A proliferation of state and local taxes will "degrade and demean the technology," he adds.

The Clinton administration opposes federal taxation of the Internet, where business dealings could rise to as much as $150 billion in the next few years by some estimates. So the battleground is shifting to the state and local level, and the industry is working hard to halt piecemeal taxation.

The emerging market for electronic commerce could be crushed, industry leaders say, if cities and counties begin approving taxes for telecommunications, data processing services or even sales.

They say Internet service providers could be driven out of business if local governments get the right to tax an electronic transaction that just happens to be routed through a local computer server en route to its final destination.

For example, someone in Atlanta who's buying clothes from L.L. Bean over the Internet might have his connection routed through Maryland and Connecticut before reaching Maine. Or the connection could be routed overseas. Also, Internet service providers might use multiple computer servers in different cities so they could stay in business if one crashed - again creating confusion over when taxes should be applied.

For the estimated 30 million individual Internet users, state and local taxes would make it more expensive to use their home computers to buy clothes or check on stock prices as Internet service providers pass these taxes onto the customer's monthly bill.

"Clearly, you talking about a potential increase in both the costs and complexity of Internet transactions," said Kenneth Glueck, a tax expert for Oracle Corp., a major database company.

This argument is gaining support in Congress.

"I just think it's important for everybody to take a deep breath and step back and really think through the implications of having ... (thousands of) potential tax jurisdictions rendering various charges and fees," said Sen. Ron Wyden, D-Ore. He and Rep. Christopher Cox, R-Calif., are proposing a temporary ban on new state and local Internet taxes until all parties agree on a uniform way to proceed.

But an opponent of the Internet tax moratorium idea, Neal Osten of the National Conference of State Legislatures, said the industry is overstating the threat.

"We have yet to see any major activity happening," he said. In fact, anecdotal evidence shows the opposite may be true. The city of Tacoma, Wash., repealed an Internet tax last year. New York state agreed to exempt Internet services from taxes. And Florida, after flirting with the idea, ultimately rejected it.

"States are not looking to raise a lot of new revenues but to protect the revenues that we do have," Osten said. "We want to know where the fire is."

Because state and local governments are actively reviewing and developing Internet tax policies, there's no reliable estimate yet about the extent of local taxation.

So far, Connecticut, Massachusetts, Tennessee, Pennsylvania, Texas, Ohio, and Wisconsin are taxing some Internet services, according to a New York State Tax Department study released last month.

Osten said he agrees that state, local and federal officials should discuss uniformity, but he also said any attempt to restrict taxing powers will be met with "a lot of anger and resentment" by state and local officials.

"States take their sovereignty, in terms of being able to tax, very seriously," Osten said.

As for the federal government, the Treasury Department in November issued a policy paper rejecting new federal taxes on the Internet, an idea reflected by a House Republican Policy Committee paper.

Last month, New York Gov. George Pataki expressed similar sentiments, making his the first state to exempt Internet service providers from state taxes. Pataki's policy means that New York-based providers that accept online advertising from companies outside the state will not have to pay sales tax on the revenue.


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