INTERNET TAXES HEADED FOR SHELF: KEEP STICKY HANDS OFF, CONGRESS READY TO TELL EAGER STATE REVENOOERS

Online traders may have to worry about the ups and downs of the stock market, but another concern seems likely to be put to rest for a while now that the Senate Finance Committee has approved a bill to put a moratorium on new taxes on Internet commerce.

The bill, approved 19-1 July 28, would stop taxes on Internet transactions or transmissions for only two years. But unlike a version passed by the House in June calling for a three-year moratorium, it also would stop levies already imposed by eight states. Another bill, OK’d by the Senate Commerce Committee in May, would nullify existing taxes and forestall new ones for six years. The full Senate is expected to take up the legislation following its August recess, and President Clinton has expressed support.

It is not yet certain which of the three versions will be considered, but clearly there’s a lot of money at stake. Worldwide online commerce should more than triple this year to $74 billion, estimates ActivMedia Research in Peterborough, N.H., and reach $1.2 trillion, nearly 4% of global trade, by 2002. In the United States, with more than 58 million adults using the Internet, 27% of regular users buy products online.

Prominent online are broker-dealers. Charles Schwab Corp. of San Francisco conducts $2 billion a week in customer transactions online — 52% of its trading volume — and is by far the largest online trader with 1.8 million active accounts and $128 billion in assets. E*Trade Group Inc. of nearby Palo Alto, a distant second with $11 billion in online assets, generates 71% of its revenues via the web.

Frank Kelly, vice president and head of government relations in Schwab’s Washington office, says it is imperative for the 60-odd brokerages offering online services to keep the tax man at bay. Taxing Internet trades is “going to start taking away many of the benefits” — such as convenience and lower cost — that draw customers, he says.

He notes that states’ efforts to impose new taxes have not been coordinated. It is not clear, for example, whether taxes would be imposed on the buyer, on the seller, on the broker, “or anywhere along the line.”

Internet providers’ worst fears were highlighted last month at a House Commerce subcommittee hearing. Wade Anderson, director of policy for the Texas comptroller’s office, told the panel on telecommunications that he regards just having computer servers in Texas as grounds for applying the state’s information service tax.

Tax officials in Texas and several other states are interpreting existing statutes as covering Internet transactions. Sterling, Va.-based America Online Inc., the nation’s largest Internet service, is fighting Connecticut’s attempts to tax its services. Tennessee and Wisconsin also require consumers to pay sales tax on their monthly Internet access fees. And Vermont’s Department of Taxes has ruled that out-of-state companies that offer products online must collect taxes on sales made to Vermont residents.

Zurich Kemper Life Insurance Cos. also supports a moratorium. “These bills would help facilitate our efforts to start doing this type of business,” says Kim Famiglietti, federal affairs representative of the Long Grove, Ill., insurer.

The mutual fund industry also supports the legislation, fearing that multiple taxation would make even accessing fund data online unviable. If a good part of the 30,000 state and local taxing jurisdictions decided to impose their own taxes, notes an official with the Investment Company Institute in Washington, “very quickly that could just bog down the development of the Internet.”

Chief opponents of the legislation, naturally, are state tax commissioners. Stanley Arnold, New Hampshire commissioner of revenue, is worried that if the Senate Finance Committee’s version were to become law, it would cost his state $500,000 in taxes imposed this year on cable television access to the Internet. “It’s difficult enough looking at a tax structure that would be acceptable to our citizens,” he says. “Now we’ve got the federal government that wants to interfere with it.”