School Groups Wary Of Online-Tax Proposals

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Some school groups and state policymakers are asking Congress to tread carefully as it takes up legislation that could limit tax revenues from sales over the Internet.

Such a measure potentially could deprive state and local governments of billions of dollars a year that could be used for schools and other essential services, the education groups say.

"We would be concerned that school districts' resources might be negatively impacted, and that [members of Congress] do consider education when they look at these bills," said Lori Meyer, the director of federal legislation for the National School Boards Association.

Rep. John R. Kasich

Congress took a major step on the issue last week, when the House, on a bipartisan vote, passed a bill that would extend by five years a three-year federal moratorium preventing states from assessing taxes on Internet access. It would also remove an exemption that the current law, called the Internet Tax Freedom Act of 1998, gives to 11 states that were already taxing such access— typically by a toll added to customers' bills for Internet service.

The bill, HR 3709, is widely considered a warm-up to a more controversial debate over taxes on Internet sales across state lines. States can apply their sales taxes to such commerce, but so far they have been almost impossible to collect.

Those who want to limit online taxation argue that the fees could stall the Internet engine they say is pumping up the nation's economy.

"At some point, we will need to consider how to modernize our tax system so that it is in tune with an economy that's moving at the speed of light," said Rep. John R. Kasich, R-Ohio, the chairman of the House Budget Committee and one of the sponsors of HR 3709, which originally called for a permanent tax moratorium.

But for now, he said in a statement, the states are "awash in revenue," much of it from Internet-fueled economic growth that would be slowed by "slapping sales taxes or access fees or any other taxes on the Internet. ... It makes no sense."

Rep. John Conyers Jr., D-Mich., who led the opposition on the House floor, said it was premature to extend the tax ban without serious study of the future impact on state budgets. He complained that the bill was being voted on without a single public hearing.

Union Opposition

Though some national education groups were only dimly aware of the bill, the National Education Association and the American Federation of Teachers joined the American Federation of State, County, and Municipal Employees and several other unions in sending a letter to House members urging Congress to let the Internet-tax law expire on schedule in October 2001.

The letter cited an estimate by the National Governors' Association that state and local governments could lose $20 billion annually by 2003 from their inability to tax purchases on the Internet, on top of $5 billion annually in uncollected sales-tax revenue on mail-order sales.

State governors, who generally supported the initial moratorium, have come out against the extension, with 44 of them signing a letter opposing the bill.

The governors fear that Congress may deny them a vital source of future revenue, a large portion of which is spent on education. States, on average, derive 40 percent of their revenue from sales taxes, according to the NGA.

But many of those sales are shifting to the Internet, a trickle that is expected to become a flood over the next decade. The trend would likely be encouraged even more by tax-free Internet access and sales.

So far, states have found it impractical to collect sales taxes on most Internet purchases when the seller is outside their borders. That is partly due to a U.S. Supreme Court ruling in 1992, in a case involving mail- order sales, that blocked states from requiring any business to collect and turn over sales taxes unless it had a "physical nexus," such as a store, in the state.

State Prerogative?

Governors also perceive the recent moves in Congress as an attempt to meddle with the states' prerogative to tax.

"We're saying to Congress, 'Butt out,'" Gov. Jim Geringer of Wyoming, a Republican, said in an interview last week.

Meanwhile, 26 states are working together on an effort to streamline and unify their sales-tax systems, as a precursor to devising a joint electronic system to collect taxes on online sales.

Despite HR 3709's swift and decisive passage through the House, by a 352-75 vote drawing heavily from members of both parties, NEA lobbyist David Bryant said he expected the debate in the Senate to go more slowly.

"We're going to encourage the world's greatest deliberative body to spend a little more time on it. I don't think it really had a full hearing," Mr. Bryant said.

Vol. 19, Issue 36, Pages 27, 31

Published in Print: May 17, 2000, as School Groups Wary Of Online-Tax Proposals
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