Four months ago, a tug-of-war between Congress and the states over Internet sales taxes made it seem as if the states were about to get soaked.
The House extended for five years an Internet tax moratorium and revoked Internet access taxes. Sen. John McCain (R-Ariz.) and others were working toward a permanent ban on sales taxes for goods and services bought over the Internet.
Now the states are getting a grip. McCain is huddling with Sen. Byron Dorgan (D-N.D.) on a bill that would give states a chance to collect from Internet retailers if they first simplify their sales taxes.
By the end of the year, tax officials from 23 states participating in a streamlining project hope to have a model sales tax to present to their legislatures.
Kansas, Wisconsin, North Carolina and Michigan will run an experiment with software providers and national retailers this fall to see if existing software can handle the challenge of sorting through hundreds of different sales tax regimes.
But there is still strong support among some members of Congress for a ban on Internet sales taxes, and industry lobbyists say the Dorgan-McCain effort has less than a 50 percent chance of passing before Congress adjourns for the fall elections.
At least the contest between the states and the federal government looks more evenly matched than it did April 12, when an Internet advisory commission recommended Congress ban any new taxes and repeal some existing ones.
The House quickly voted to extend the moratorium on new Internet taxes–set to expire Oct. 21, 2001–until 2006. The bill revoked access-charge taxes grandfathered under the original moratorium.
House Majority Leader Dick Armey (R-Texas), a champion among Republicans for freeing the Internet of taxes and regulations, said during the debate that he would rather his home state lose some tax revenue than see the Internet stymied by government.
“Texas is better served by growth, economic development, expansion, invention, creativity, innovation, discovery and the wonder that comes with high-tech America than they are served with the paltry little bit of sales tax increase they can get by applying discriminatory taxation to the driving engine of the American economy,” Armey said.
Governors and state legislators worried about lost tax revenue from sales done over the Internet did not object to extending the moratorium.
Neither did shopping center owners and Main Street retailers, who fear Internet sellers will gain a built-in price discount if they do not have to collect sales taxes.
The concern was that the moratorium would be taken for something it isn’t. “This has been described as a `no-sales-tax’ moratorium. That’s not the case. Every item bought on the Internet, if the state where the buyer lives has a sales tax, is subject to what’s called a use tax,” said Rick Lane, director of e-commerce and Internet technology with the U.S. Chamber of Commerce.
When consumers buy directly from a store, the retailer collects the sales tax. Out-of-state stores, catalog sellers and Internet retailers are required to collect sales taxes only in the state where they have a physical presence, or nexus.
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The consumer is still liable for paying the tax in his home state, which is called a use tax. Few people pay use taxes, both because they are unaware of them and because the taxes are difficult to enforce.
The federal moratorium applies to new taxes aimed specifically at the Internet or that multiply taxes already paid somewhere else.
State officials and Main Street retailers say they fear an extension of the moratorium will be interpreted by voters as a ban on Internet sales taxes, unless it is coupled with a plan for dealing with remote sales and use taxes.
“If they just pass the extension, sales and use taxes will never be addressed,” said Sarah Whitaker of the National Retail Federation.
The Republican Party’s platform calls for extending the moratorium, while the Democratic Party’s platform is silent on the issue. Presidential nominees Vice President Al Gore and Texas Gov. George W. Bush have endorsed an extension, and the parties have assiduously courted the high-tech industry for support in this fall’s election.
Despite those efforts, retailers who want Internet sellers to collect sales taxes say a simple extension of the moratorium is no longer in the cards.
“The House version will not pass,” said Lisa Cowell, executive director of the e-Fairness Coalition.
Cowell attended both the Republican and Democratic conventions to lobby on the issue.
“High-tech isn’t the only community out there,” she said. “Retailers, real estate and labor are all key constituency groups for both parties. … We’ve been very successful in educating Congress on the implications of this issue.”
The Advisory Commission on Electronic Commerce heard many of these same arguments but would not agree to extending the reach of the sales tax to the Internet. Virginia Republican Gov. Jim Gilmore chaired the 19-member commission and led the antitax majority. His reasoning was that the advocates for extending the sales tax to the Internet were more interested in additional revenue than in equity.
“Government tax coffers are full with tax surpluses at all levels,” he wrote in a letter to Congress. “When protax advocates were asked to keep the playing field level for taxpayers by reducing other taxes to compensate for additional taxes on electronic commerce, they steadfastly rejected `revenue neutrality.”‘
Gilmore won over 11 of the 19 commissioners. The rest, led by Utah Republican Gov. Michael Leavitt and Dallas Mayor Ron Kirk, submitted a minority report urging the strategy of extending the moratorium while the states crafted a streamlined sales tax model. Once the model was in place, the minority urged, Congress should endorse state efforts to apply it to the Net.
Powerful figures in the high-tech world have had something to do with shifting the momentum toward the commission’s minority view. Andrew Grove, the chairman of Intel Corp., and Carly Fiorina, chief executive and chairman of Hewlett-Packard Co., told congressional panels that Internet-based companies do not need a sales-tax exemption.