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    Follow-Up / News in Depth

    Cutting Edge Nat'l Internet Issue Comes to LB: Vice Mayor Colonna Urges Clarified Stance On Legislation Re Taxing Internet Transactions:

  • Colonna Opposes Sales/Use Taxes On Web Transactions, Urges Preserving City's Right To Keep Receiving Revenue From Current Utility Taxes
  • Colonna & Baker Agree To Refer Issue To Joint Meeting of Their Fed'l & State Legislation Committees For Further Proceedings


    (February 4, 2004) -- Noting that whether to allow state and local taxation of internet transactions is a subject of considerable debate -- and stating that he personally does not support taxing of internet sales -- Vice Mayor Frank Colonna (who chairs the City Council's Federal Legislation and Environmental Affairs Committee) has urged clarification of LB's lobbying stance on the issue.

    At the February 3 Council meeting, Vice Mayor Colonna urged referring the issue back to the Federal Legislation Committee for publicly agendized discussion.

    The issue arose in the context of City Hall's federal legislative agenda, a list of policies adopted with Council approval that City Hall will support or oppose in 2004. A state legislative agenda regarding items in Sacramento is likewise adopted by the Council after being heard in a committee chaired by Councilman Dan Baker.

    "There is a significant amount of debate regarding sales and use taxes on the internet," Vice Mayor Colonna said, noting "I for one as a Councilmember do not support the adding or taxing of internet sales."

    Colonna asked the Council to delete two draft items ("Support legislation that would allow for the collection of sales/use taxes on internet transactions" [and] "Oppose legislation that would preclude states from taxing internet sales"] and instead add a proviso to protect the city's ability to continue collecting its current utility user's tax...which provides a sizable chunk of City Hall revenue.

    Some local government advocates, including the League of CA Cities, have strenuously argued a federal ban on state or local internet taxes -- if too broadly written -- could jeopardize the ability of cities (like LB) to collect utility taxes on items like cell phones.

    Vice Mayor Colonna suggested adding language to the city's current federal legislative policy to "support legislative efforts to ensure that the city receives the maximum benefits from internet commerce" by adding the proviso "to include protecting the city from the loss of utility user's tax."

    Vice Mayor Colonna said:

    Now what is developing in the industry, I guess you want to call it the e-industry, there is a strong possibility, and very likely in the future, that the internet will be used for cell phone operations, and as we know in our city, we have utility users tax that is approximately 1/3 of our incoming revenues from the use tax on the use of cell phones in Long Beach.

    So I think we should be very cautious in watching what the financial impacts of this could do to us if, in the event, the city is precluded from collecting user's tax from the interaction of the internet.

    But that, Madam Mayor, is what I'm asking that we would revise and not put our efforts into looking at the issues of the collection of sales and use taxes on the internet...To the best my knowledge, our two U.S. Senators are not in support of it. The administration is not in support of it, and does not seem to be any major move to tax the internet at this time...

    Councilmember Bonnie Lowenthal concurred with Vice Mayor Colonna's motion to refer the subject to the Federal Legislation Committee for further discussion, saying the issue of internet taxation deserved local discussion since it had alrady become a major subject of discussion within the National League of Cities. Councilman Dan Baker likewise concurred with Vice Colonna's motion and noted that the Council had recently adopted a state legislative agenda which included some verbiage supporting state legislative efforts to ensure local taxation authority of products purchased through the internet.

    Since this seemed to be in conflict with the current discussion, Councilman Baker recommended that the issue be referred to a joint meeting of the Council's state and federal legislation committees. Vice Mayor Colonna agreed and so moved. The motion carried 9-0.

    Background

    In November 2003, Senator Dianne Feinstein (D, CA) adopted the position of the CA League of Cities and helped stymie legislation by Congressman Chris Cox (R., Newport Beach) and Sen. Ron Wyden (D, OR) that seeks to extend permanently a moratorium on new taxes on the internet. The federal internet tax moratorium expired on Nov. 1, 2003...and the Cox-Wyden "Internet Tax Non-Discrimination Act" would enact a continuing moratorium...and has passed the House.

    Senator Feinstein took to the Senate floor (transcript below) to argue for amendment of the Cox-Wyden bill. Sen. Feinstein said she supports a moratorium on internet taxes...but contended the Cox-Wyden bill could affect the ability of cities and counties to collect revenue from existing taxes (including some telecommunications or utility taxes). Sen. Feinstein advocated a moratorium on internet taxes for two years, coupled with a study of its effects.

    The issue of whether local and state governments should be able to tax internet sales is a big ticket item pitting the increasing number of internet consumers and internet-based businesses (who say exempting web transactions benefits consumers and encourages innovation and growth) against state and local governments (who say exempting internet transactions costs them money) backed by some traditional business interests who feel disadvantaged (at losing sales). Internet advocates, noting the resourcefulness of government at finding ways to impose taxes, fear that state and local internet taxes could stifle innovation and growth of the fledgling medium.

    In January 2003, Congressman Chris Cox (R., Newport Beach CA) and Senator Ron Wyden (D-OR) introduced the Internet Tax Non-Discrimination Act to extend permanently a moratorium on new taxes on the internet.

    "By ending this unfair practice once and for all, we can protect Internet users from unnecessary and burdensome taxes," said Cong. Cox in a written release, adding "This will encourage spending, promote investment, expand business, and create new jobs."

    Cox and Wyden had previously authored the 1998 Internet Tax Freedom Act, which prohibited taxes on Internet access; taxation by multiple states on products purchased over the Internet; and discriminatory taxes that treat Internet purchases differently from other types of sales. The law expired in October, 2001. Cox and Wyden then wrote the Internet Tax Non-Discrimination Act, signed into law in Nov. 2001 by President Bush, which extended the ban on Internet taxes until November 1, 2003.

    Cox and Wyden's 2003 legislation sought to extend the ban on internet taxes indefinitely and passed the House...but hit a roadblock in the Senate when Sen. Feinstein (and others) argued that cities which rely on taxes from telecommunications (like utility taxes) could suffer if more people use the internet for phone calls and other types of business.

    Claiming that the Cox-Wyden internet tax moratorium could threaten the ability of cities and counties to collect such existing taxes that help fund police, firefighters and other public safety efforts, Sen. Feinstein said on the Senate floor on November 7, 2003:

    Mr. President, I very much hope we do not pass the underlying bill today. I believe it is premature. In my 10 years in the Senate, I have never heard from more California cities, specifically 104 of them, indicating their concerns about what the underlying bill would do to the budgets of their cities.

    Here in my hand are some of the letters. This issue has energized cities in my State like no other. City mayors are incensed that we would pass a law without knowing with certainty how it would impact local revenues.

    I have received letters from the League of California Cities, which represents all of California's 478 cities, from county administrators, police officer associations, firefighter associations, all of whom are concerned about this bill - and I cannot answer their questions about it.

    But, they understand the larger issue. They are telling us the bill contains language that threatens their ability to collect existing taxes on certain telecommunications services. And, again, I cannot answer these questions, and these questions cannot be answered on the floor of the Senate today. They are too complex.

    This is precisely why the Carper-Alexander amendment is the most appropriate approach: extend the moratorium for another 2 years and do a study. Bring the cities together with the professionals, and see exactly what taxes are impacted by the underlying bill...

    Since we originally passed the Internet Tax Freedom Act, we knew this day would come, the day when we would need either to extend the tax moratorium or allow the temporary moratorium to expire.

    California has a passionate interest in maintaining unfettered access to the Internet. We have a globally recognized concentration of high-tech and telecommunications firms. We provide much of the infrastructure required to gain access to the Internet and many of the services that make the Internet so useful. However, we have to make sure that maintaining tax-free access to the Internet does not inadvertently destroy the budgets of cities and counties throughout my State and the Nation. Many of them have come to rely on a variety of telecommunications services fees and taxes as an important part of their revenue base.

    Now, I support the permanent extension of the Internet Tax Freedom Act, but if I had to vote today on it, I would have to vote no. I am a cosponsor of Senator Wyden's original legislation that would make permanent the current moratorium. But if I had to vote today on the Allen/Wyden bill, I would vote no because a number of uncertainties have arisen and nobody can answer those uncertainties...

    If this bill's definition of telecommunications services is interpreted in an overly broad way, as many of us think it may be, it will negatively impact local budgets. It will lead to the possibility of reduced preparedness in our firehouses and our police stations and less money for our schools, and it will do so at a time when States and cities face large budget deficits.

    Right now, in San Diego, California, a huge debate is going on as to whether the San Diego County firefighting forces are adequate; whether they have the vehicles, whether they have the training, whether they have the ability to really respond to fire conflagration. If we move ahead precipitously today, this bill will make that situation worse.

    I must tell you, as a former mayor, these are my concerns. For San Francisco, the city in which I served, the bill's current definition of telecommunications services could lead to a loss of $30 million annually. San Francisco, as their experts compute, will lose $30 million of existing taxes if we pass this bill in its present form. That translates into 300 police and firefighters.

    In the city of Pasadena, the mayor, Bill Bogaard, says this would cost his city $11.4 million. That is the legislation before this body today. Let me quote from his letter:

    "By using vague language to include broadband Internet access under the moratorium, we fear that the bill will allow telephone and cable companies to use that protection to avoid paying local franchise or utility fees."

    He goes on to state: "It is our understanding that it was not the intent of the bill's sponsors to endanger local franchising authority, but the legislation has yet to be changed to correct these unintended consequences."...

    I wish to quote from one more of the letters I have received from our mayors. This is from Judith Valles, the mayor of the City of San Bernardino, which was the focus of one of California's main wildfires. She wrote to me to point out, and I quote:

    "Currently, 150 cities in California levy a utility users tax, or what is called a UUT, which in many cases includes telephone and cable television services. Utility users taxes provide a critical contribution to local discretionary revenue, on average 15 percent of general purpose revenues, making the utility users tax vital in helping fund critical city services, particularly public safety."

    This comes from a mayor who is still dealing with the threat that her city faced due to the recent California wildfires. And why? Because we are afraid to step back and give the telecommunications industry and cities more time to work out a solution to this issue with which they can both live?

    I appreciate Senator Wyden's frustration that if we let the debate rage on too long, it will never end. I appreciate that sometimes you have to make a decision, and that if it is not perfect, you fix it along the way. But this is not one of those times.

    If you run the risk of repealing taxes that are already in place, you unavoidably affect local budgets, and I am not willing to do that at this time. I believe people want their tax dollars used on the local level. They want better police. They want better fire protection. They want the emergency services for adequate protection, particularly at this point when America stands a risk from terror. And it makes no sense to rush to pass a bill when you have cities all across this country saying: Don't do it. It is going to inevitably impact what we now levy.

    This will not affect the telecommunications companies because the Carper-Alexander amendment extends the current law with minor changes. Just extend the moratorium for 2 years, do the study, permit the parties to come together and work this out.

    I do not think it is one Member's goal to undermine the existing tax base of local cities and counties across this great Nation in passing a permanent moratorium. We have never wanted to do that. We are told today that the underlying bill does, in fact, do that. So why -- why -- rush to pass it? My goodness.

    I love my high-tech companies, but the cities and counties are where the people are, and they need police and fire and emergency services. In a day of cutbacks, it makes no sense, because we don't know what we are doing today - and to simply willy-nilly pass a bill that may well do that makes no sense. We then will have to shuffle around and find a way to correct it at some point in the future. In the meantime, budgets are upset all across the Nation. That is not good government, it is not good public policy, and it is not good legislation.

    I am here to add my support and the support of 104 cities in California to the Carper-Alexander amendment. I would be most happy to offer my services in any way I can to work with the committee chair, the ranking member, and Senators Wyden and Allen, to try to find a solution. It makes no sense to pass something without an adequate study and the reconciliation of the industries...

    The debate on this issue should not be centered on who is right and who is wrong.

    Unfortunately, that is where we are today. On one side we have the telecommunications industry saying the cities are overreacting to the impact this bill will have on their budgets. On the other side, we have the cities saying the telecommunications industry is seeking special, nearly unprecedented, tax treatment.

    Why is it we would not want to give these two stakeholders time to put their heads together and bring Congress an agreement they can both live with?

    Let me be clear: I want a permanent extension but not at the cost of laying off firefighters, police officers, and teachers.

    Sen. Feinstein's views echoed those of the "League of California Cities," non-government group that represents the viewpoint of City Halls. An advisory on the League of CA Cities' web site (viewed by us on Jan. 30) stated in pertinent part:

    INTERNET TAX NON-DISCRIMINATION UPDATE: THANK SENATOR FEINSTEIN FOR ALL HER WORK ON BEHALF OF CITIES.

    Senator Feinstein has shown tremendous leadership on behalf of Californiaís 478 cities in the fight against the expansion of the definition of Internet access included in S. 150, the "Internet Tax Non-Discrimination Act of 2003."

    Demonstrating a clear understanding of city finance in California, and the extent to which the expanded definition of Internet Access would result in a loss of badly needed discretionary revenue for cities at a time when they face large budget deficits and continuing uncertainty about state action on other sources of critical revenue, Senator Feinstein took the floor on November 7th to passionately oppose the revised definition in the measure. She urged her colleagues to do the same because of the devastating impact the change would have on citiesí ability to provide essential services, including public safety services. In making her case on the Senate floor, Senator Feinstein cited the Leagueís opposition to S.150 as well as the 104 letters she received from California cities individually, as enough to convince her that the measure as currently drafted is flawed. She reminded her fellow Senators that "cities and counties are where the people are, and they need police and fire and emergency services."

    Thanks in large part to Senator Feinsteinís efforts, S. 150 stalled and further action on the measure was delayed until the billís proponents could reach a compromise with Senator Feinstein and others expressing concern on behalf of state and local governments. Negotiations about the billís future continue, and it remains possible that some form of the bill could be attached to the omnibus appropriations act that Congress will consider within the next week.

    ...As a former mayor herself, Senator Feinstein once again stood by the League, and the now 118 cities her office has heard from on S.150. At the event, she argued that a simple, temporary, two-year extension of the moratorium was the most responsible course of action to take on S.150 given all the confusion with regards to the definition of Internet Access and it application to rapidly changing technology, she argued.

    Cities that contacted Senator Feinstein over the past month to urge her to oppose the expanded definition of Internet Access are encouraged to follow-up with her and let her know that we appreciate her taking city concerns so seriously. Please contact...the League if you have additional questions about this federal legislation.

    Meanwhile, the newly named chair of the CA Assembly's Revenue and Taxation Committee, Ed Chavez (D., San Gabriel Valley) introduced AB 1791 on January 29, 2004 to reinstate CA's Internet Tax Freedom Act which expired January 1, 2004.

    In a written release, Assemblyman Chavez's office notes that local governments "have recently begun a vigorous lobbying effort to ensure that Congress does not extend the federal ban, leaving Californians to rely only on the State Legislature for protection." Assemblyman Chavez said in the release, "It is imperative that we send a strong message to the high-tech and telecommunications industries that California will not use the tax code to discriminate against them," adding "California must take action to ensure the health of our business climate, and extending the ITFA is just one necessary step."

    The bottom line: these cutting edge issues will be discussed in a forthcoming publicly agendized joint session of the LB City Council's state and federal legislation committees...which will consider the issue and refer a suggested policy back to the City Council for adoption.


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