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Senate Amends Internet Tax Freedom Act

(October 7, 1998 11:00 PM EDT.)  The Senate today continued its on again, off again, consideration of S 442, the "Internet Tax Freedom Act."  In a series of votes held over about ten hours, the Senate attached an amendment offered by Sen. Coats allowing taxation of net porn, set the moratorium at three years, grandfathered existing net taxes, and expanded the scope of the study to be conducted.  The Senate is scheduled to resume consideration Thurday morning.

Most of the negotiations, debate, and compromise over the bill have been going on in private.  Senators have gone to Senate floor to announce agreements, introduce amendments, engage in delaying procedures, and hold votes.  Also, some of the active participants have been delivering speeches. 

Proponents of the bill argue that is important to protect the Internet from a myriad of state and local taxes.  Opponents jealously defend the power of states and localities to collect taxes. After many days of consideration, the debate has become highly repetitive, and often irrelevant. Sen. Bumpers today talked about the ozone layer, and Sen. Graham read from the Bible.

Opponents have been employing delaying tactics, while the proponents have sought unsuccessfully to bring the matter to a quick conclusion.

Some of the key players on this issue in the Senate are:

  • Sen. Ron Wyden (D-OR), the sponsor of S 442, and over the long haul its most ardent backer in the Senate; he represents a state with no state sales tax, and many high tech computer and Internet industry companies, such as Tektronix, Sequent, and Mentor Graphics.
  • Sen. John McCain (R-AZ), Chairman of the Senate Commerce Committee, floor manager of the bill, and strong supporter.
  • Sen. Judd Gregg (R-NH), sponsor of an alternative version of the bill earlier this year; he represents a state with no sales tax and many mail order catelogue companies. 
  • Sen. Byron Dorgan (D-ND), floor manager of the bill; he has worked to limit the scope of the bill.
  • Sen. Bob Graham (D-FL), ardent opponent of the bill, and supporter of state and local sales and use taxes.
  • Sen. Dale Bumpers (D-AR), opponent of the bill, and longtime proponent of legislation that would enable states to collect taxes on remote retailers. 

The voting has revealed several patterns.  Senators from states most dependent on sales taxes tend to vote to delay and limit the bill.  Senators from states with significant computer and Internet industry companies tend to vote to strengthen the bill.   Senators from states with mail order and e-commerce businesses tend to vote to strengthen the bill.  And Republicans, more than Democrats, tend to vote to strengthen the bill.

The Senate began the day with a cloture vote.  It passed 94 to 3.

Net Porn

Sen. Dan Coats (R-IN) offered a long anticipated amendment regarding Internet pornography.  His 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.

Coats Amendment Excerpt
(No. 3695)

(1) IN GENERAL.---Subsection (a) shall also not apply in the case of any person or entity who in interstate or foreign commerce is knowingly engaged in the business of selling or transferring, by means of the World Wide Web, material that is harmful to minors unless such person or entity requires the use of a verified credit card, debit account, adult access code, or adult personal identifications number, or such other procedures as the Federal Communications Commission may prescribe, in order to restrict access to such material by persons under 17 years of age.

Sen. McCain also rose to argue in favor of the amendment.  Sen. Chris Dodd (D-CT) offered an amendment (No. 3780) to the Coats amendment regarding use of blocking software which was approved by voice vote.  The Senate held a roll call vote at noon on the Coats amendment (No. 3695) as modified.  It passed by a vote of 98 to 1.

The Coats amendment (Amendment No. 3695 to S 442) is not the same as the original Coats bill on net porn (S 1482).  The Coats bill banned distribution to minors of material that was harmful to minors. The Coats amendment merely exempts the same from the tax moratorium.  (The Senate decided earlier in its consideration of S 442 that all amendments had to be germane to the bill.)

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.

Scope of the Study

The Senate then debated at length in the early afternoon two amendments to S 442 that would define the scope of the study to be conducted during the moratorium by the independent commission tasked under the bill with studying Internet taxation, and reporting back to the Congress.  Sen. McCain, Sen. Gregg,  Sen. Joseph Lieberman (D-CT), Sen. Wyden and others supported limiting the study to Internet taxation, while Sen. Graham, Sen. Hutchinson (R-AR), and others supported expanding the scope to cover all sales and use taxes on remote sales.

Sen. Hutchinson offered an amendment to expand the scope of the study.  Sen. McCain made a motion to table it, which failed on a roll call vote of 30 to 68.  The Senate adopted the expanded scope of the study.

Duration of Moratorium

The Senate next took up the issue of how long the moratorium should last.  An amendment (No. 3719) that would provide for a three year moratorium was offered.   Sen. McCain and Sen. Dorgan each offered second degree amendments (amendments to this proposed amendment).  The version of S 442 passed by the Senate Finance Committee provided for a two year moratorium.  The Senate Commerce Committee version provided a six year moratorium.  This amendment (No. 3719) provided for a three year moratorium.  It also included language that would grandfather existing taxes.

Sen. Dorgan's amendment (No. 3779) as modified addressed the grandfathering language, and passed by unanimous voice vote.  The McCain amendment (No. 3783) would increase the moratorium from 3 to 4 years.  It was debated at length.  Sen. McCain and Sen. Wyden argued for the four year ban, while Sen. Bumpers and Sen. Graham argued against.

In a close roll call vote, the McCain amendment to extend the ban to four years failed, 45-52.  Hence, the bill contains a three year ban.  This is the same as the House version of the bill (HR 4105).

Grandfathering Existing Taxes

The Senate next debated and voted on whether to include a clause that would grandfather existing taxes.

Granfathering Amendment Excerpt
(No. 3719)

PRESERVATION OF STATE AND LOCAL TAXING AUTHORITY.---Except as provided in this section, nothing in this Act shall be construed to modify, impair, or supersede, or authorize the modification, impairment, or superseding of, any State or local law pertaining to taxation that is otherwise permissible by or under the Constitution of the United States or other Federal law and in effect on the date of enactment of this Act.

Sen. Frank Murkowski (R-AK) spoke against it.  He said that it would unfairly advantage those states that rushed to impose taxes.  He also said that it would  set a bad example for the international trading partners of the United States.  The U.S. is trying to encourage other nations not to impose taxes on international e-commerce.  This grandfathering clause, said Sen. Murkowski, would set a bad example.

Sen. Dorgan spoke in favor of the amendment.

A vote on a motion to table the amendment failed 28 to 69.  The grandfathering clause is a part of the bill.

Pending Matters

Sen. McCain, noticeably exasperated by the delaying and procedural tactics used by the opposition, said on the Senate floor late in the evening that consideration of S 442 would resume Thursday morning.  He said that the Senate has yet to resolve a dispute over what constitutes a discriminatory tax, before it can vote on final passage. 

Related Stories

Clinton Endorses ITFA, 2/26/98.
Lieberman and Gregg Introduce an ITFA, 4/1/98.

Commerce Committee Passes ITFA, 5/15/98.
ITFA Limits FCC Control Over Net, 5/15/98.
Judiciary Committee Passes ITFA, 6/18/98.
House Passes ITFA, 6/24/98.
Senate Finance Committee Passes ITFA, 7/29/98.
Senate Moves Closer to Passing ITFA, 9/30/98.
Senate Debates and Delays ITFA, 10/3/98.
Senate Debates Net Tax Bill, 10/6/98.

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