Battle Over Net Sales Tax Heats Up

The battle over sales taxes on e-commerce transactions is shaping up, with
many of the nation’s governors pushing Congress for relief on perceived lost
revenues, while e-tailing companies and industry associations assert that
such taxes would cripple their nascent businesses.

In fact, more than 40 state governors are expected to sign a letter this week
to all members of Congress urging them to reject a flat-out moratorium.

The governors want a chance to develop a mechanism that would allow for
collection of online sales taxes, according to an article in The Washington

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

A House of Representatives panel said on Aug. 1 that it would press ahead
with plans to extend a ban on Internet-specific taxes, while sidestepping
controversial efforts that could allow states to tax online commerce.
The Post quoted a draft of the governors’ letter as saying: “If you care
about a level playing field for main street retail businesses, and local
control of state’s governments and schools, extend the moratorium on taxing
Internet access only with authorization for the states to streamline and
simplify the existing sales tax system.”

One of the difficulties with online commerce and sales taxes is that there
are so many state and local jurisdictions (an estimated 7,500) with the power
to levy sales taxes.

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.

Spending in many states for education and other services is dependent on
sales taxes, especially those states with no income tax. The loss from not
collecting Net taxes “could be large enough to compel many states to choose
between reducing spending, or seeking new revenues through higher tax rates
or (other) new taxes,” G. Thomas Woodward of the Congressional Budget Office
reportedly told a recent Senate hearing.

“What we’re deciding is whether or not transactional taxes are going to be
viable in the 21st century,” the Post quoted Utah Gov. Michael Leavitt as
saying. “They may not be, but if they are not, policymakers have to start
wrestling with alternatives.”

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