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Don’t believe slams on no Net taxes bill

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With all the misinformation and disinformation whipping around the “Internet Tax Freedom Act” bill now in the House and Senate, I half expect to see a message fired into cyberspace accusing the bill of secretly causing the downing of TWA Flight 800.

That’s a ludicrous notion, I grant you. It carries about as much weight as the theory that the ill-fated flight was downed by a missile. Just as ludicrous is the claim that if passed, this bill, which intends to keep any new taxes from being placed on Internet-specific services, will bankrupt state and local treasuries. Yet exactly this claim is being made by Wade Anderson, director of tax policy for the state of Texas.

Anderson has testified twice before congressional committees on the merits of the bill, claiming that if it goes into law, Texas stands to lose $2.75 billion annually in tax revenue. Anderson says that sponsors of the bill “might be surprised to discover” that companies with no apparent hook to the Internet, such as retail stores and oil companies, would be allowed tax exemption under the bill. Anderson also claims that telephone companies would be able to claim an exemption from taxes because it is a “system that ... enables computer access by multiple users to a computer server.” Based on those predictions, Anderson says he now has the support of the National League of Mayors in opposing the bill.

Small problem: The bill doesn’t say any of that.

Indeed, the chief sponsors of the bill, Sen. Ron Wyden, D-Ore., and Rep. Chris Cox, R-Calif., have painstakingly written language into the bill that specifically says any taxes now collected will be allowed to continue.

“We’re not looking for any special treatment of the Internet,” Cox says. “We’re looking to keep the Internet tax neutral.”


To the credit of those backing the bill, they’ve already tweaked the language several times to address concerns that it was too ambiguous, a situation that might have allowed a broad interpretation such as Anderson claims.

The tweaking has apparently done the trick. In a letter I obtained from congressional sources, Anderson has quietly backed away from his dramatic public statements about potential losses of tax revenue.

In the letter to Commerce Committee Chairman Sen. John McCain, R-Ariz., Anderson writes that after looking at the new language, he believes it “goes a long way toward addressing a number of problems raised in my testimony regarding the bill and no longer poses the threat of extraordinary losses in current revenues to the states.” Anderson goes on to say he is still concerned about “sales taxes” and now claims that Texas would lose $15 million to $20 million annually in tax revenue collected on “access charges, information services and other services connected with the Internet and online services.”

No surprise there. Texas is perhaps the leading “tax-happy” state in the nation when it comes to groping the Net for new tax revenue. Wyden, testifying before a recent House hearing on the Internet Tax Freedom Act, noted that Anderson brags: “Texas is a leader in taxing services surrounding the Internet.” Wyden went on to point out that in addition to taxing home pages on the Net, Texas taxes Internet Service Providers twice, once when they lease phone lines and again for access to those same lines!

“Although the bill specifically allows states and localities to continue to levy all technologically neutral taxes, such as sales, income, gross receipts, property and business license taxes, some politicians just can’t keep their hands off the Internet,” Wyden said.

There are some 30,000 possible taxing jurisdictions in the United States, according to bill co-sponsor Rep. Rick White, R-Wash. White says the possibility of each of the jurisdictions weaving a patchwork of conflicting new taxes on the Internet is a nightmare. The gist of the bill is “simple,” White told me:

“We just don’t want any new taxes added to the Internet just because it’s the Internet.”


So where does the confusion come in?

First is the attitude of people like Anderson, who sees the bill as a preemptive strike against tax collectors everywhere. False. The bill only calls for a two-year moratorium on placing any such taxes on Internet services, giving Congress the chance to drill down on some very complex issues, such as “nexus,” or what constitutes an in-state “presence,” which is what allows a company to be taxed. The two-year study will allow a much more informed look at how and where taxes should be applied to Internet-based transactions.

Second, there’s confusion about whether the same type of tax you now pay when buying something through a catalog would not be allowed if you bought that same product via a web site. False. If that sweater you buy from an L.L. Bean catalog is taxed now, you have to pay the same tax if you order it from the L.L. Bean web site.

Let’s get a bit tricky. If telephone service is taxable now, what about telephone service over the Internet or through a cable system that also allows you to connect to the Net via a cable modem? “It’s taxable,” said Wyden at the recent House hearing.

Now, if all those alarms and red flags just went off in your head like they did in mine when I heard that statement, hang in there because there’s a good explanation for this:

I could just imagine someone trying to tax those using the Internet to make telephone calls. Sure the technology to make long-distance phone calls via the Net pretty much sucks, but it does work. You can boot up a piece of software, speak into a microphone connected to your computer and talk to someone across the globe, for free. Now Wyden was saying that would be taxable?

During a break in the hearing for a floor vote in the House, I raced to White’s crack legislative staff for clarification.

“No, the bill won’t allow anyone to tax phone calls made through an Internet connection,” White’s staff assured me. However, if telephone service is offered as a “value-added” service by your Internet Service Provider or cable company, “then it can be taxed.”

The catch comes if the “telephone service” is offered as a separately priced service. The key phrase there is “separately priced service.” But that scenario is extremely unlikely with an ISP and cable companies have already essentially abandoned any plans to offer telephone service. So your lousy (but free) long-distance Net phone calls are safe.


This bill is one of those rare events in Washington in which Congress has gotten a clue and done the right thing. As Cox and Wyden like to say, “the growth of Internet taxes could kill the goose that is starting to lay golden eggs.”

But all this good will toward the Internet by Congress makes me twitchy. The bill doesn’t seem to have any significant opposition in either the Senate or the House and should sail through smoothly.

I’ll feel better after it is passed. Given the congressional track record on Internet issues, anything can happen. Let’s hope they pull this one off and improve their average.

Meeks out…