Senate Deal Would Bar New Net Taxes

Everybody can now breathe a little easier: Senate negotiators reportedly have reached
an agreement to extend the current moratorium on any new Internet taxes for
another five years.

However, the deal apparently would open the door for increased collection
efforts for existing sales taxes, the bulk of which now go unpaid for sales
made over the Internet.

The moratorium is scheduled to expire in October. The Internet Tax Freedom
Act, passed by Congress in October 1998, imposed a three-year moratorium on
Internet access taxes and on multiple or discriminatory taxes on electronic

The House voted
last year
to extend the moratorium.

However, the bipartisan compromise includes a concession to state and local
governments (most of which depend on sales taxes for about a third of their
revenues) giving states five years to simplify their sales tax-collection
systems, according to a report in USA Today online. If Congress approves the
plan, taxes on almost all Internet and catalog purchases would then be

The no new taxes part clearly is good news for ISPs and e-commerce and portal
site operators. Still, collecting sales taxes and figuring out how to pay
them in all 50 states would likely be difficult and expensive for site

Internet sales at present are handled the same 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 are looking at figuring
out how to accommodate about 7,600 state and local taxing jurisdictions, each
with different rates and rules.

“We’ve been working for well over two years to allow the Internet to grow
without discounting states’ needs for resources,” Sen. John Kerry, D-Mass.,
was quoted as saying.

Under the proposal, states would have to create uniform definitions for goods
and services. They also would have to agree on one national sales tax rate or
at least one rate per state, and Congress would have to approve the plan.
Businesses with $5 million or less in annual revenue would be exempt.

A spokesman for the Bush administration was quoted as saying that the White
House supports the bipartisan plan.

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