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New Congress Could Tackle Important Internet Issues

BY Christopher Stern
by Christopher Stern on 12/29/00.

The new economy kept Congress busy this year. It held more than two dozen Web-related hearings and passed bills increasing the number of foreign high-tech workers allowed to immigrate to the United States and giving electronic contracts the same legal footing as those written in pen and ink.

But when the new Congress begins work as early as next month, lobbyists will be stalking the halls on a variety of Internet-related matters, including three key issues: online privacy, Internet taxation and copyright reform.

Dot-com stock values are plummeting and new-economy layoffs have become part of the daily news cycle, but there is little doubt that the Internet is having a fundamental impact on the way the nation lives and does business. Consumers are expected to spend $ 10 billion this year buying products online. And Napster's 44 million users continue to download millions of songs without paying a dime in royalties.

The new Congress may have an evenly divided Senate and a slim Republican majority in the House, but Internet related legislation tends to be bipartisan and not likely to be directly affected by political bickering. Lawmakers from both sides of the aisle are eager to do their part for the new economy and the deep-pocketed companies that are creating it.

"What politician wants to be against the Internet?" asked Jonathan Potter, executive director of the Digital Media Association.

Congress has hardly been sitting on its hands during the past year when it comes to new-economy legislation, but almost as soon as it resolves one issue, another pops up demanding attention.

President Clinton has also been active in the last weeks of his presidency. He has authorized a new federal rule that bars companies from transferring medical records of patients to third parties without the consent of the individual. Clinton's action was hailed as a victory by privacy advocates who are concerned that companies will buy, sell and trade personal medical information.

Congress is still expected to debate a new law that would limit the ability of companies to buy, sell or trade sensitive financial data, such as credit-card numbers and credit information.

Gene Kimmelman, co-director of the Washington office of Consumers Union, called financial privacy a "blockbuster issue" for the new Congress.

Business groups such as the U.S. Chamber of Commerce will lobby against the effort, insisting that companies are policing themselves. But Rick Lane, director of e-commerce and Internet technology in the chamber's congressional affairs office, acknowledges that both Democratic and Republican lawmakers know their constituents are concerned about online privacy. "We are realistic enough to understand that these issues poll through the roof," Lane said.

Another issue the new Congress is sure to take up is the moratorium on Internet taxation. A three-year federal ban on states enacting taxes specific to Internet transactions expires in October, and legislators must decide whether to extend the ban or make it permanent. The law is intended to ensure that products bought over the Internet are not taxed at different rates than if they are bought in the bricks-and-mortar world.

Lawmakers are expected to adopt the recommendation of a congressionally convened panel, which concluded in April that the moratorium should be extended for five years.

Extending the ban is a no-brainer, said Erick Gustafson of Citizens for a
Sound Economy, a conservative free-market advocacy group. Gustafson points out that since Internet-related taxes have not yet been built into local budgets, it is painless to extend the moratorium. "It is not going to shut down schools. It is not going to eliminate firetrucks," Gustafson said.

A trickier issue for Congress to resolve is a pending proposal to help states collect taxes for products that are bought on the Internet and shipped across state lines. Most Internet transactions are not taxed. But few people realize that they are supposed to pay local "use" taxes if they don't pay taxes in the state where the item originated. States are concerned about losing out on billions of dollars in taxes as more commerce moves off Main Street and onto the Internet.

Now there is growing momentum for states to streamline local tax policies, to make it easier for Internet companies to calculate local taxes owed on each purchase. Some states are trying to link approval of the tax moratorium to a new law that would require Internet companies to collect local taxes when they send items across state lines.

Consumers not only haven't had to worry about paying taxes on Internet purchases, but in the case of music, many haven't been paying anything at all.

Tens of millions of Web surfers have discovered that it is easier to download a song free from Napster's Web site than it is to buy it in a store. Despite their popularity, Napster and other Web sites are struggling for survival in the face of lawsuits from the major record companies, which claim the sites aid and abet the theft of copyrighted material., another online music site, has already agreed to pay $ 170 million to settle lawsuits filed by the same major record companies.

But Senate Judiciary Committee Chairman Orrin G. Hatch (R-Utah) has described file-swapping sites such as Napster as positive because they allow recording artists to connect directly with their audiences without interference of record labels. "I view the stakeholders as the people on the two ends of the wires," Hatch said during an October hearing that included testimony from Napster founder Shawn Fanning.

Hatch, a songwriter and performer who has recorded his own music, expects to hold more hearings on copyright issues next year. Napster and are girding for battle and have hired high-powered lobbyists. Napster hired Hatch's former chief of staff, Manus Cooney, and hired Billy Pitts, a longtime Hill aide who was most recently in Walt Disney Co.'s Washington office. They're squared off against the Recording Industry Association of America, a trade organization that represents the major record labels. In addition, many of the labels have their own lobbyists.

Pitts said Congress faces a difficult task--protecting the rights of copyright holders while ensuring that copyright does not get in the way of exciting new technologies. But there must be changes, said Pitts. Despite current laws, consumers are demanding easy access to music and other copyrighted material on the Internet. "The current mechanisms are not working," he said.

Capitol Hill's Internet Agenda

Databases: Copyright protection of databases is an issue that divides new-economy companies such as Yahoo and eBay. The online auction site wants its databases legally protected so other Web sites may not hold their own online auctions with material originally posted to eBay. Joining eBay are organizations such as the National Association of Realtors, which wants to ensure that rival real estate agents cannot poach home listings.

Broadband: This legislation is likely to be influenced by the Federal Trade Commission's decision to require America Online and Time Warner, as a condition of their merger, to open their cable lines to rival Internet service providers. Lawmakers are expected to seek to create a uniform federal policy on open access. The proposal could end up requiring all cable companies to open their networks to rival ISPs.

Internet gambling: Congress is likely to again take up the debate of Internet gambling next year. The most recent version of the bill banned most Internet wagers but created exemptions for gambling on dog racing, horse racing and jai alai.