Web Sales Tax Plan Stalls in Congress

A controversial proposal to give states broader authority to tax Internet and catalog sales appears to have stalled again in Congress, raising doubts about whether a compromise can be reached by the fall as supporters had hoped.

Key members of the Senate Commerce Committee are trying to insert the provision into a bill that would extend the current moratorium on new Internet access taxes.

But the senators--Byron L. Dorgan (D-N.D.), Ron Wyden (D-Ore.), John McCain (R-Ariz.) and John F. Kerry (D-Mass.)--have been unable to resolve the differences between the states, which stand to gain billions of dollars by taxing e-commerce, and some technology and business groups, which either oppose Internet taxation or want the states first to simplify their tax rates and codes.

Even if the senators reach an agreement in the coming weeks, the measure faces an uncertain future in the House, where many members favor making the Internet tax-free.

“The states are asking Congress to make the tough decision of raising taxes on people,” Rep. Bob Goodlatte (R-Va.) said. “But there hasn’t been nearly enough progress on the part of states so far to simplify their tax rates.”

Goodlatte introduced a bill Tuesday that would extend the current moratorium on Internet access taxes--an idea that has broad support in Congress--but does nothing about the more controversial proposal to grant states new powers over e-commerce sales.

Some states have tried to link the sales tax issue with the extension of the moratorium. If states can’t tax Internet sales, they argue, they need the power to impose Internet access fees to raise revenue, as they do for telephone and cable services.

Estimates on how much states stand to gain in Internet sales tax revenue vary widely. The congressional General Accounting Office found that taxes on e-commerce would raise $1 billion to $12.4 billion a year. A University of Tennessee study found that states could receive $20 billion a year beginning in 2003 if they could impose sales and use taxes on remote sellers.

Though states have vowed in principle to simplify their tax systems to make compliance easier for out-of-state retailers, there is still disagreement over key issues. They include how many tax rates each state would have, how much oversight Congress would provide and what steps states would need to take before Congress granted them the new tax power.

Many business groups, confounded by the current 7,500 sales tax rates nationwide, want each state to adopt a single rate. States insist that rates must vary by city or county so that local governments can use sales taxes as local needs require.

Several U.S. Supreme Court decisions have held that states may not tax out-of-state retailers unless the companies have a physical presence, such as a distribution center, in the state. Congress, however, has the power to extend such taxing authority to states, if it chooses.

The moratorium on Internet access taxes, by contrast, was adopted in 1998 to prevent states from levying new taxes on Internet users and service providers. At the time, some states and local governments were threatening to levy surcharges on consumers’ monthly Internet bills. One idea would have a tiny tax charged on each Web page loaded on a computer. The moratorium, which expires Oct. 21, also prohibits states from levying “discriminatory” taxes only on purchases made online.

Rep. Christopher Cox (R-Newport Beach) is pushing legislation that would permanently ban Internet access taxes and extend the ban on discriminatory Internet taxes for at least five years. A similar measure was passed overwhelmingly by the House last year but was deadlocked in the Senate Commerce Committee.

Groups including the National Governors’ Assn., the National Conference of State Legislatures and the Streamlined Sales Tax Project are moving to simplify tax rates and adopt uniform definitions for such items as “food” and “clothing.”

For example, some states consider a handkerchief to be clothing; others do not. Some states view orange juice as fruit while others consider it a beverage.

“Is Twix a candy bar or cake?” asked Neal Osten, committee director of the National Conference of State Legislatures. He said 14 states had adopted one of the models for a more uniform tax system.

“Give us a chance to work it out,” Michigan Gov. John Engler, vice chairman of the National Governors’ Assn., said at a recent House hearing.

Business leaders remain skeptical. Frank Julian, tax counsel at Federated Department Stores, parent of Macy’s, said Congress needs to set clear limits before giving states new tax powers. “States created the horrible situation we have today,” Julian said. “It’s chaos.”

He noted that some governors don’t support the current effort. California Gov. Gray Davis, for example, is among a few state leaders who worry that taxing Internet sales would hurt their states’ technology businesses.

Nevertheless, Federated and other national businesses say they will support giving states the power to tax remote sales as long as simplification takes place first. Federated spends $10 million to $20 million to collect nearly $1 billion in state taxes annually, Julian said.

Businesses want to be reimbursed for that cost in the future. Under one proposal, Julian said, if states win the power to tax remote sellers, businesses would receive 3.5% of the proceeds to cover the costs of collection.