ISPs Ready to Fight State Internet Taxes

Separate effort mulled to limit levy on e-commerce

By Kathleen Murphy 

 While state governments across the country continue to look for ways to tax Internet services and sales, Internet service providers are putting up a strong battle against any such taxation. And a recent spate of actual or proposed tax cuts in New York, Massachusetts, and Florida has given them reason to believe they may succeed.

In mid-January New York's Gov. George Pataki agreed to exempt ISPs from sales taxes, and Massachusetts Gov. William Weld proposed to eliminate the state's 5 percent tax on Internet services in his annual budget submitted late last month. And a panel appointed by Florida's governor made a similar recommendation Jan. 17.

"Florida is sort of a bellwether state, and it may have some persuasive effect that we've chosen this course," said Robert Goldman, a member of the Florida commission and a partner in Vikers Madsen & Goldman, of Tallahassee. The question of taxation was raised in Florida when Jim Marchant, president of Mercury Communications, asked the simple question of whether his Gainesville, Fla., ISP was required to charge a sales tax on Internet access services.

In response, Florida's department of revenue handed him 10 different formulas he'd have to apply, Marchant said. "But no one in the department knew how to use the formulas," he added.

"I knew if I was ever audited at that point, I would be toast," he said. Marchant, who also serves as vice president of the Florida Internet Services Provider Association, decided to take action.

That led to a movement to pass legislation to exempt Net service providers from taxes, which the State legislature approved last year. But politics being politics, the legislature also tacked similar provisions onto the bill exempting several other industries. Gov. Lawton Chiles vetoed the bill, then suspended Internet tax collection until July, 1997, and appointed a panel to study the matter. The Legislature is expected to take up the issue again in March.

"If we do anything to hinder the development of this industry, it could hinder it for a long time and put a lot of people out of business," said Marchant, whose company also provides software services for intranets.

Across the states, several industry associations are spearheading lobbying efforts against the taxation. The Interactive Services Association, Silver Spring, Md., issued a white paper in December calling for states to avoid the imposition of taxes on online services. The Information Technology Association of America, Arlington, Va., sponsored a forum on the issue in Santa Clara, Calif., last month.

Yet several states are finding ways to tax the growing industry despite thorny questions such as whether online transactions constitute sales, whether online vendors have a collection responsibility within a taxing jurisdiction, and whether it's possible to determine the jurisdiction in which the sale occurs.
Texas imposes a sales tax on downloaded software and Net access. And Tennessee's tax department ruled in December that its sales tax applies to ISPs. In Massachusetts, ISPs pay a 5 percent sales tax on access services, which the governor proposes to eliminate. Alabama's revenue department also has ruled that access charges should be subject to the state's utility tax.

Now the federal government is considering stepping into the Internet tax quagmire. Rep. Christopher Cox (R-Calif.) and Sen. Ron Wyden (D-Ore.) have submitted legislation that would impose a moratorium on any new federal, state, or local taxation of electronic commerce. The Cox-Wyden bill would call on the Clinton Administration to produce a comprehensive Net policy to block the imposition of any new Internet taxes. In November, the U.S. Department of the Treasury said the Internet shouldn't be used to justify new federal taxes.

International taxes, too, are already a concern for ISPs. The European Commission has introduced an EC-wide value-added tax for users of ISPs at the point of consumption.

"The issue is probably not going to go away," said Goldman, the Florida attorney. "Expect to see efforts in the future to impose taxes on Internet access."

Reprinted from Web Week, Volume 3, Issue 2, February 03, 1997 © Mecklermedia Corp. All rights reserved. Keywords: government_regulation Date: 19970203