Stop the Madness

In an effort to head off "cyber tax chaos," Rep. Christopher Cox (R-Calif.) and Sen. Ron Wyden (D-Ore.) are introducing a bill that would place a moratorium on new Internet taxes. The bill, which had not been finalized at press time, would prevent state or local governments from passing any new Internet taxes, including sales and telecommunications taxes. It would apply retroactively, probably to January 1, 1997.

Sales on the Internet totaled $500 million in 1996, but could grow to tens of billions by 2000. States and local governments see the Internet as a potentially huge source of revenue. But there are a number of unresolved practical, legal, and constitutional issues (See Citings, January and March). The U.S. Constitution prohibits states and local governments from taxing interstate commerce, unless the company has a substantial physical presence within their jurisdiction. But due to the decentralized nature of the Internet, several states could claim a taxable nexus on any given electronic sale. Even if the nexus is clear, collecting taxes won't be easy.

"Before these fundamental questions are answered," Cox says, "states and localities are rushing to tax the goose that lays golden eggs."

To help answer these questions, the bill would require the Clinton administration to submit a comprehensive plan regarding electronic commerce taxes within two years. One solution that's been proposed is to create a national sales tax, but a recent Treasury Department white paper put the kibosh on that idea.

Another provision in the bill prohibits the Federal Communications Commission from levying access charges–currently limited to telephone companies–on Internet service providers.

Cox and Wyden, who teamed up two years ago to promote an ultimately unsuccessful anti-regulatory alternative to the Communications Decency Act, hope to move the legislation through Congress quickly, before the appropriations bills make their way to the floor.