Congress Mulls Internet Sales Tax

By CURT ANDERSON : AP Tax Writer

Apr 29, 2001 : 8:02 pm ET

WASHINGTON -- Congress must soon decide whether to keep the Internet a largely tax-free shopping zone or pave the way for states to collect sales taxes on most online purchases.

There is little doubt lawmakers will extend a moratorium expiring this October that bars taxes on Internet access and prohibits taxes that single out the Internet. The bigger question: What do to about sales taxes? While laws in 45 states say those taxes are owed, they rarely are collected.

At stake are billions of dollars in revenue for state and local governments as well as tax fairness between traditional brick-and-mortar retailers and their Internet and catalog competitors.

Congress' General Accounting Office has estimated that uncollected sales taxes on Internet purchases could cost the states $12.5 billion in 2003. Remote sellers, meanwhile, say complying with thousands of different taxing jurisdictions would create a costly new burden -- and could lead to imposition of more taxes in the future.

"This is a complicated and controversial issue," said Sen. Byron Dorgan, D-N.D., sponsor of a bill providing a way for states to eventually collect Internet sales taxes. "It's a tax that is already owed. The question is how you work it out so the consumer can more easily pay it."

The taxes are not collected now mainly because of the Supreme Court, which has ruled that a business must have a physical presence -- such as a warehouse, a retail store or an executive office -- before a state can require sales tax collections on out-of-state purchases. Few states have tried to force their citizens to pay the tax from remote sales on their own.

In the Senate, negotiators have tentatively agreed on an extension of the moratorium through 2006. The measure would also expand states' sales tax collection authority, but only if at least 25 states simplify their own multiple tax rates. Congress would still have to give final approval to the new system.

"What we're working on is if a state is allowed to do this, there would be one rate," said Sen. Ron Wyden, D-Ore., sponsor of one leading bill. "I think you can do a lot of harm to e-commerce by setting up a maze of taxes."

The Senate Commerce Committee is scheduled to consider Internet tax legislation as early as Thursday. "I think we're very close to agreement," said Sen. John McCain, R-Ariz., the committee chairman.

Some 32 states are in formal discussions at developing a streamlined sales tax collection system, according to the National Conference of State Legislatures. In 25 states, legislation has been introduced to simplify tax rates in anticipation of congressional permission to collect the taxes.

Vice President Dick Cheney recently endorsed extension of the moratorium on Internet access taxes and taxes that single out the Internet, but the Bush administration is taking a cautious stance on sales taxes.

"The groups are working passionately to reach a compromise, and we are encouraging it and monitoring it," said Mark Weinberger, assistant Treasury secretary for tax policy.

A coalition of retailers and shopping centers, including Wal-Mart, is lobbying for sales taxes to apply equally to all sales. Many Internet businesses are much more willing than in the past to accept such a system, as long as the compliance burdens are not too great.

"It's the biggest sea change of the debate," said Jeffrey Friedman, partner on electronic tax issues at the KPMG accounting and consulting firm. "At one time, the idea of states extending their reach was a nonstarter."

But there are fears among some that once states get the authority to collect sales taxes, which would grant new audit authority, some could attempt to impose license fees, corporate income taxes or franchise taxes on business activity.

"It puts business in the middle of revenue grabs between the various states," said Mark Nebergall of the Software Finance and Tax Executives Council.

Some lawmakers view new state collection powers as essentially a tax increase, which would face an especially tough road in the Republican-led House.

Rep. Billy Tauzin, chairman of the House Commerce Committee, said he does not sense "any will in the political gut" to tackle the issue of state sales taxes, but agrees the states should be given a chance to prove their case.

"I think people would like to keep this thing on the burners so states are encouraged to work this out," said Tauzin, R-La. "I really don't see us doing much more than extending the current law."

-- Anonymous, April 30, 2001