The Web: The taxman cometh

By GENE J. KOPROWSKI, United Press International  |  Nov. 12, 2003 at 2:08 PM
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Another in a series of UPI articles examining the current state and future prospects of the global telecommunications network known as the Internet.


CHICAGO, Nov. 12 (UPI) -- Is the taxman about to pay a visit to the World Wide Web? That is the current fear of some online merchants and policy experts.

It has been nearly two weeks since the national Internet tax moratorium lapsed, meaning there no longer is any legislation preventing state lawmakers from taxing online commerce.

At the end of the summer, the U.S. House of Representatives passed a bill that would ban Internet access taxes permanently, as well as other levies that discriminate against online users. The legislation has become mired in the Senate.

"Though the bill sounds straightforward, passing it is not an easy task," said Jeff Friedman, a partner in the state and local tax group of KPMG LLP in Washington, D.C., part of an international accounting and tax firm.

"There are different opinions on what has to happen here," he told United Press International.

In 1998, Congress passed an Internet tax moratorium that prohibited state and local governments from taxing access to online services and from imposing taxes unfairly on e-commerce merchants who did not maintain a physical presence within their taxing jurisdiction.

That bipartisan effort was led by Sen. Ron Wyden, D-Ore., and Rep. Chris Cox, R-Calif.

The law grew out of earlier court rulings that held it was illegal for government authorities to tax direct marketers, such as catalog merchants, who did not have a "nexus" or local presence in their jurisdiction. The main rationale, however, was taxation authorities should not stifle the Internet in its infancy as a commercial medium and national legislation would be a more effective remedy than ad hoc litigation by aggrieved e-merchants.

In the five years since the law was passed, the technology has changed, and policymakers today are debating the meaning of Internet access.

"Internet access today is different than years ago with a dial-up modem," Ken Silverberg, a partner in the Washington office of the national law firm Nixon Peabody LLP, told UPI. "Today there are cable modems, digital subscriber lines, satellite access and different companies providing these kinds of services."

The National Governors Association and other organizations have joined the debate, opposing the expansion of the definition of Internet access because they fear doing so would exempt an array of telecommunications services that currently are taxed.

A permanent tax exemption for certain telecom services -- the newer access technologies -- would cost states "billions of dollars in revenue," NGA Executive Director Raymond G. Scheppach said in a statement.

"Governors operate in a world where they must balance their budgets," he continued. "By pre-empting existing telecommunications taxes, S. 150 (The Internet Tax Nondiscrimination Act) will force states into the red and further hamper their ability to provide government services."

Silverberg said other lobbying organizations have joined the NGA in its position and leading legislators, such as Sen. Lamar Alexander, R-Tenn., and George Voinovich, R-Ohio -- both former governors -- are trying to address the concerns of state and local governments.

Scheppach said although the economy is recovering from the recession, the problems for state tax systems likely will last into the 2005 fiscal year.

"Admittedly, it is complicated to carve out an exemption for Internet access without creating an unintentional tax shelter for others," Silverberg said. "There's a lot of lobbying, and these interest groups are throwing around charts with all different kinds of language, charting millions, or perhaps billions, in revenue losses. But in many cases, these groups have been opposed to the tax moratorium since the beginning."

Silverberg said he worries about the long-term ramifications of losing the federal moratorium on Internet taxation.

"It's interesting," he said, "what is going on and the political maneuvering. But what happens if the legislation dies? There's big money, potentially, on sales taxes on Internet purchases. That is going to be the major fallout if this statute isn't made permanent. States are throwing out the theory that if you do business with an (Internet service provider) in their state then they can tax you. The expiration of the law could be the starting gun to go after Internet merchants."

Leading online businesses, unlike the characters in Eugene O'Neill's play, "The Iceman Cometh," are not living in denial. They worry the taxman indeed may be coming to the Net.

Iggy Fanlo, chief revenue officer at Inc., in Brisbane, Calif., said it would be a burden for online merchants to collect taxes in states where they did not have a presence.

"You would need an army of people, and you wouldn't be able to administer it," Fanlo told UPI. "That's an undue administrative burden. If you've got physical presence in 50 states, collecting taxes is only reasonable. But not if you only are there virtually."

Congress is the place where the legislation setting rules for e-commerce must be set, Fanlo said.

"Getting local and state government entities to agree on taxation is impossible. It's like trying to get them to agree on how to spell 'cat.'"

Nicholas Nesi, a partner in BDO Seidman LLP, a law firm in New York City, said he thinks Congress in the coming weeks likely will agree to a bill to extend the moratorium temporarily.

Nesi said in recent years, many local phone companies have been receiving ever-larger portions of their revenues from monthly bills for Internet services, and there is a concern in the state government policy community that the companies are trying to cheat the government out of revenues by expanding the "penumbra" or shadow of the Internet access tax moratorium.

"It's possible there would be a compromise, but they probably need to study it some more," Nesi told UPI. "Telecom services are one of the most highly taxed services in the country, especially as tax revenues overall have been reduced over the last few years."


Gene Koprowski covers technology and communications issues for UPI Science News. E-mail

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