Internet's Tax-Free Days Put to the Test

Tod Hunter
WASHINGTON — Recent moves in the U.S. Congress will decide whether the tax-free status of lnternet shopping and broadband connection will continue.

Federal law currently bars Internet access charges and sales on the Internet from being taxed at the local or state level. But new lobbying efforts, coordinated through groups including the National Governors Association, may change this. This week, state and local governments lobbied Congress to be allowed to impose sales taxes on online shopping, and impose new taxes on DSL and other Internet connections.

During a House of Representatives hearing on May 22, politicians considered whether to let a temporary ban on Internet access taxes lapse when it expires on Nov. 1.

If Internet-based taxes are not authorized, other taxes may go up, according to Sen. Michael Enzi, R-Wyo. "Are we implicitly blessing a situation where states are forced to raise other taxes, such as income or property taxes, to offset the growing loss of sales tax revenue?" Enzi said at a Senate hearing on Wednesday. "I want to avoid that."

On May 22, Enzi introduced a bill that would require mandatory sales tax collection for Internet purchases. A House backer of another pro-sales tax bill said this week to expect a final version by July.

Currently, Seattle-based Amazon.com is not required to collect sales taxes on shipments to millions of its customers in states like California, where Amazon has no offices. (Californians are supposed to voluntarily pay the tax with their annual state tax returns, but few do.)

The group NetChoice, which includes Yahoo, eBay and the Electronic Retailing Association, opposes the sales tax plan and fears that the change in parties will make it happen. But San Francisco-based sex toy retailer Good Vibrations is not worried.

"If it's applied fairly, to all competitors across the board, then I don't see that it would have any impact, necessarily, on us," Good Vibrations President and CEO Theresa Sparks told XBIZ. "My fear is that it would be applied primarily to the larger, more established retailers, and we would be penalized for it. Some of our less-established online competition may end up not paying it. That's my only concern. I would be very surprised if the government would be able to evenly apply it to some of our more agile competitors."

The Internet access tax moratorium expiration in November is serving as a focus point for Internet tax efforts. Four bills are currently under consideration: The Enzi bill, which calls for mandatory sales taxes on Internet purchases; S. 156 and H.R. 763, which renew the Net access tax moratorium permanently; and H.R. 1077, which renews the Net access tax moratorium permanently and also eliminates grandfather provisions that allow nine states to collect taxes on Internet access.