Permanent Moratorium Proposed for Net Taxes

Bipartisan legislation was introduced Tuesday that would permanently extend the moratorium on Internet access taxes
and electronic commerce taxes.

Reps. Bob Goodlatte (R-VA) and Rick Boucher (D-VA) introduced a bill, dubbed the Internet Tax Fairness Act, that would put a permanent moratorium on those taxes and clarify the current nexus standard for business activity taxes. The current moratorium is set to expire in October.

Goodlatte and Boucher are the House of Representatives Co-Chairs of the U.S. Congressional Internet Caucus, a bi-partisan group of representatives and senators working to educate their colleagues on technology issues.

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.

Last year, the House voted 352-to-75 to extend the moratorium an additional five years — to October 2006 — through the Internet Non-Discrimination Act, a bill sponsored by Rep. Christopher Cox (R-Calif.) and amended by Goodlatte and Boucher.

In February, a similar bill was sponsored in the Senate by Sen. Ron Wyden (D-OR); however, the Senate version would have expired on December 31, 2006. Under the Wyden bill, states would be encouraged to transition toward a uniform tax code for Internet usage.

The new Goodlatte-Boucher bill would take those proposals a step further and make the moratorium permanent.

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.

State and local governments, on the other hand, depend upon sales taxes for about a third of their revenues and have been less than willing to give up on the tax revenues generated by e-tailers.

But Goodlatte and Boucher maintain that Congress needs to clarify when a seller has sufficient nexus with a state that it would be required to meet business activity and income tax reporting and payment obligations of that state. Their bill lists a number of scenarios in which a business should not be subject to a business activity tax, including the use of the Internet to create or maintain a Web site that is accessible by residents of a state or the use of an ISP to process orders via a Web page on a server that is physically located in a state.

“We must continue to ensure that the Internet remains free from restrictive taxation by making the tax moratorium permanent,” Goodlatte said. “In addition, this important legislation will ensure fairness, minimize litigation, and create the kind of legally certain and stable business climate which encourages businesses to make investments, expand interstate commerce, grow the economy and create jobs. The nexus provisions are necessary, common-sense clarifications that will benefit states and businesses by eliminating gray areas and establishing ‘bright lines’ regarding what constitutes a physical presence.”

Boucher added, “By providing definite standards to both companies and states, our legislation will promote the continued growth of electronic commerce and interstate commerce generally, and ensure that states and localities which provide services to companies operating in their jurisdictions will receive revenue for those services.”

The Software & Information Industry Association (SIIA) hailed the new Goodlatte-Boucher bill as critical to the survival of the digital marketplace.

“With the introduction of this legislation, Representatives Goodlatte and Boucher have reaffirmed their commitment to preventing expiration of the existing moratorium on multiple and discriminatory taxes, and taxes on Internet access,” said SIIA President Ken Wasch. “SIIA views an extension of the moratorium as a critical step to ensuring that the digital marketplace is not inhibited by new and unfair taxes on the Internet and electronic transactions.

“Additionally, we are very pleased to see this critical step today towards
establishing ‘bright-line’ nexus standards for business activity taxes. Such
clarification is extremely necessary in our digital economy to eliminate the
potential for double taxation and uncertainty among businesses.”

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