Internet Moves Closer to Tax Haven

The U.S. government moved one step closer to a permanent ban on Internet access taxes and a five-year extension on the moratorium on multiple or discriminatory Internet taxes Thursday, when the House Judiciary Subcommittee on Commercial and Administrative Law passed the “Internet Tax Nondiscrimination Act” (H.R. 1552).

However, Judiciary Committee spokesperson Jeff Lungren told the E-Commerce Times there is more work to be done when the bill moves to the full Judiciary Committee inSeptember, before going to the full House.

“I expect a much more spirited debate in September,” Lungren said.

The proposed law, which would prohibit states from targeting Internet purchases for taxes that do not apply to other forms of commerce, received hearty support in 2000, passing the House by a vote of 352 to 75, before running aground due to inaction in the Senate.

Tale of Two Taxes

At Thursday’s mark-up session, according to Lungren, a few representatives indicated their intentions to propose amendments to the bill regarding the length of the extension on the current moratorium on multiple or discriminatory Internet taxes.

Congress originally imposed the moratorium on the Internet-related taxes mentioned in H.R. 1552 in 1998 with the Internet Tax Freedom Act, which is due to expire October 21st.

However, one committee member, U.S. Representative Melvin Watt (D-North Carolina) proposed an amendment to the bill pertaining specifically to another tax issue: sales tax collected on interstate Web-based transactions.

The hotly contested issue of whether e-tailers should have to collect sales taxes from their out-of-state customers is one that Watt and other congressmen argue should beconsidered in conjunction with the multiple tax issues addressed by H.R. 1552.

Connected Points

“Both issues are logically related,” Watt told the E-Commerce Times. “And we need to resolve both of them, or at least keep moving forward on them.”

However, Watt’s amendment was deemed non-germane by the subcommittee.

“[Internet sales tax] is a huge issue,” said Lungren. “With the October deadline approaching, we wanted to pass the important moratorium extension, and deal withthe sales tax issue separately.”

States Cry Foul

Aaron Lukas, analyst at the Cato Institute’s Center for Trade Policy Studies, told the E-Commerce Times that the main arguments voiced by Internet sales tax proponents are that states are losing revenue on purchases made from out-of-state sellers, and that it is unfair that brick-and-mortar stores must collect taxes from out-of-state residents, while pure-play Internet retailers arguably do not.

According to a 1992 Supreme Court decision, states cannot require out-of-state retailers such as mail-order, catalog and Internet companies to collectsales taxes unless they have a physical presence in the state.

Advocates of an Internet sales tax say they aim to simplify state tax codes so states will be allowed to collect sales taxes from interstate vendors.

Leveling the Field

“There’s a disparity between brick-and-mortar stores and Internet stores,” Watt said, “that should not exist, any more than taxation on Internet access should exist.”

Lukas, however, pointed out that during a period in 2000 when the Internet was experiencing its most rapid growth ever, state sales tax revenues actually surged 7.3percent.

“That, along with the fact that online retail sales still account for less than 1 percent of all retail activity, suggests that revenue losses to states dueto Internet shopping have been trivial,” Lukas said.

Watt said he hoped a solution on the Internet sales tax issue could be reached withinfive years or sooner.

Hurdles Ahead

What is clear amid the ongoing multi-faceted debate is that extending the current tax moratorium will not resolve the Internet sales tax issue.

“States are free to impose sales taxes on Internet transactions [even under the moratorium], if they can find a good way to collect them,” said Lukas. “What we aretalking about is a tax collection problem, not a policy designed to favor the Internet.”