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Ban On Internet Taxes Scaled Back

A House panel has voted to scale back a proposed extension of the ban on new Internet taxes from five years to two after language supporting the efforts of some states to collect sales taxes on e-commerce transactions was struck down.

The current ban expires Oct. 21. The decision, by unanimous voice vote according to Reuters, amounted to a substantial weakening of the original bill, which called for a permanent ban on Internet access taxes and a five-year extension of the ban on other discriminatory taxes.

The big issue has been sales taxes, with many state governments complaining that they are being denied revenues rightly due to them. E-commerce companies, which do business in all 50 states, have long contended that collecting sales taxes from state and local jurisdictions puts an undue hardship on their nascent businesses.

A coalition of states is in the process of simplifying their tax codes with the hope that Congress will allow them to collect sales taxes on remote sellers. Some estimates put the lost taxes as high as $13 billion for this year.

Bipartisan legislation was introduced last summer that would have permanently extended the moratorium on Internet access taxes and electronic commerce taxes.

In Congressional action Wednesday, Judiciary Committee Chairman James Sensenbrenner, a Wisconsin Republican, struck down language supporting the states' efforts on sales tax collection, saying it was not relevant to the issue at hand, according to Reuters.

Proponents then sought to shorten the extension to as short a period as possible so Congress would be forced to confront the issue again. A proposal to extend the moratorium for only eight months failed, but the two-year proposal eventually passed.

The original moratorium stems from the Internet Tax Freedom Act, passed by Congress in October 1998. The act imposed a three-year moratorium on Internet access taxes and on multiple or discriminatory taxes on electronic commerce.

Currently, Internet sales are handled in the same way as catalog and telephone sales: If the retailer has a store in the purchaser's state, a sales tax is supposed to be added to the bill. But the Supreme Court has ruled that companies cannot be required to collect taxes in states where they have no physical presence.

Pure-play e-tailers have contended that if they are required to collect sales taxes and pay them to the appropriate agencies, they will be forced to figure out how to accommodate about 7,600 state and local taxing jurisdictions, each with different rates and rules.

The move to shorten the extension got a boost last week when Sen. Byron Dorgan, a North Dakota Democrat, proposed extending the ban for nine months, with the hopes that it will spur lawmakers to reach an agreement on the ability of states to tax online purchases.