Sales Tax Mess Needs a Cleanup

The U.S. House of Representatives voted Wednesday to extend the moratorium on Internet sales taxes until 2006. The measure (HR 3709) does not change the current law, under which states can impose, but not collect, sales taxes from nonresident merchants such as mail-order houses or Internet sellers. What it does do is delay or even kill removal of the unfair tax advantage that e-commerce enjoys over traditional retailing. The bill deserves to die in the Senate or be vetoed by the president.

As with so much of what Congress produces in an election year, the proposed Internet Tax Freedom Act is not what it appears. It does ban the imposition of new taxes on the Internet but does not prevent the states from taxing Internet sales. Simply, it leaves state and local governments in their current dilemma: They can impose the tax but, under a pair of U.S. Supreme Court decisions, cannot reach into other jurisdictions to collect it. California has a tax on sales by out-of-state merchants but relies on voluntary payment by the customers. There are very few volunteers.

What the states need is federal legislation that would override the high court decisions and authorize interstate collection of sales taxes. State governors are drafting a model sales tax law that, if adopted nationwide, would simplify the existing hodgepodge of state and local sales taxes and make it easy for retailers to collect them. They hope to have the law drawn up by the end of the year and in place by January of 2004.

As long as e-commerce remains untaxed, companies like Amazon.com enjoy considerable advantage over their brick-and-mortar competitors and consumers who buy from e-commerce businesses save. But as sales tax havens, the dot-coms have an unfair competitive advantage over traditional retailers. Traditional retailers that set up Web operations are still collecting sales taxes in states where they have a store, but some are already exploring ways to avoid the sale tax in order to compete. The erosion of the tax base would be devastating to municipalities, especially in California, where local governments are financed almost entirely from sales tax collections.

Sales tax money in part pays for everything from public safety to roads and public transportation. The House bill does nothing to make sales taxes fairer.