Senate Approves Internet Tax Freedom Act

(October 9, 1998)  The Senate approved S 442, the "Internet Tax Freedom Act," yesterday by a vote of 96 to 2.  The bill establishes a three year moratorium on new discriminatory state and local taxes on the Internet and Internet access, and creates a commission to study the subject of Internet taxes.

The tax moratorium bill, sponsored by Sen. Ron Wyden (D-OR), was also amended to include several Internet related bills, including the "Child Online Privacy Protection Act," the "Government Paperwork Elimination Act," and sections pertaining to Internet porn and blocking software.  The bill also includes several sections pertaining to completely unrelated pork barrel projects.

"Senate approval means Internet tax freedom will be a reality this year," said Rep. Chris Cox (R-CA), the sponsor of the bill in the House. "The White House, Governors Wilson, Pataki, Gilmore, Cellucci, Bush, and dozens of consumer and business groups have endorsed this bill because it is vital to the Internet's continued growth and technological development.  I'll be working with the Senate tonight and tomorrow to get a final bill to the President for his signature by Monday."

The bill contains a three year moratorium.  The Senate Commerce Committee had reported a bill with a six year moratorium.  The Senate Finance Committee had reported a bill with a two year moratorium.  The House passed a bill (HR 4105 EH) on June 23 with a three year moratorium.  An amendment to extend the moratorium to four years failed on a roll call vote of  45 to 52 on October 7.

The moratorium covers taxes on Internet access and multiple or discriminatory taxes on electronic commerce.  The key definition of discriminatory tax is found at Title I, Section 104(2).

The bill also states that existing taxes will be grandfathered from the provisions of the bill. A motion offered by Sen. Frank Murkowski (R-AK) that would have excluded this provision failed by a vote of 28 to 69 on October 7.

The bill also creates an Advisory Commission to study the subject of Internet taxes.  The Senate adopted by unanimous consent an amendment offered by Sen. John McCain (R-AZ), floor manager of the bill, establishing a 19 member Commission, instead of the 16 member Commission created in the bill reported by the Senate Finance Committee. The 19 member Commission would be made up of three federal officials (Secretaries of Commerce, Treasury, and the U.S. Trade Representative), eight representatives from business and industry, and eight representatives from state and local governments (one representative would be from a state or local government that does not impose a sales tax).

One of the most hotly argued issues during the Senate's floor debate was the scope of the study.  The Senate rejected on October 7 by 30 to 78 an amendment that would have expanded the scope to cover all sales and use taxes on remote sales.

On October 2 the Senate tacked onto S 442 two significant Internet related bills, S 2326, the "Children’s Online Privacy Protection Act of 1998," and S 2107, the "Government Paperwork Elimination Act."  They were added by an amendment approved by "unanimous consent" on October 2.  Both bills had been reported out of the Senate Commerce Committee by unanimous votes also.  The amendment was not debated on the floor.

S 2326, the "Child Online Privacy Protection Act," is sponsored by Sen. Richard Bryan (D-NV).  It would ban operators of websites and online services that are directed to children from collecting information from children under thirteen without parental consent.  The bill does not set forth specifications for this procedure. Rather, it delegates to the Federal Trade Commission the authority to promulgate regulations to enforce this restriction.  It also gives the FTC enforcement authority.

S 2107, the "Government Paperwork Elimination Act" is sponsored by Sen. Spencer Abraham (R-MI).  Its title is a misnomer typical of Congressional bills.   While it requires federal agencies to make online versions of their forms available to the public, its most important feature is that it allows individuals and businesses to use digital signatures to file forms electronically.  The legal validity of digital signatures is fundamental to the development of electronic commerce.

The Senate also amended S 442 with two sections designed to protect children from pornography on the web.

Sen. Dan Coats (R-IN) offered an amendment regarding Internet pornography that was approved by a vote of 98 to 1. Only Sen. Patrick Leahy (D-VT) voted against.   The amendment, as approved by the Senate, exempts from the tax  moratorium any commercial website engaged in the business of the commercial distribution of material harmful to minors that does not restrict access to such material by children.

The Coats amendment is not the same as the original Coats bill on net porn (S 1482) or Rep. Oxley's Child Online Protection Act.  The Coats bill would ban distribution to minors of material that is harmful to minors. The Coats amendment to S 442 merely exempts the same from the tax moratorium.

Sen. Leahy explained his solo vote against the Coats amendment as follows:

"The United States is the cradle of the Internet, and when we regulate it, we need to act with care because the world is watching.  As a prosecutor I worked hard to put away child molesters, and there are more effective and more responsible ways to deal with that problem than this amendment offers.  We must not rashly lower the bar of First Amendment standards for the Internet, and we should think twice before giving the government the authority to regulate what is carried on the World Wide Web, however tempting it is to do that."

The Coats amendment also states that it does not apply to telecommunications carriers, Internet access services, "Internet information location tools", or anyone who transmits any "communication made by another person, without selection or alteration of the communication."  The Coats amendment also does not apply to non-profit entities.

The Senate also added an exemption to the tax moratorium for Internet access providers that do not offer blocking software.  This amendment, offered by Sen. Chris Dodd (D-CT), was approved by a voice vote.

Finally, the bill also includes four sections which pertain to unrelated pork barrel projects.  All pertain to government and/or media studies projects at universities.  And each of the projects is named for a current or former U.S. Senator.