OMB Watch weighed in on the "Internet Tax Nondiscrimination Tax" considered by the House Judiciary Committee in September, 2001. September 18, 2001 House Judiciary Committee U.S. House of Representatives Washington, DC 20515, Dear Representative: The Judiciary Committee will be considering H.R. 1552, the Internet Tax Nondiscrimination Act, very soon. The bill would prohibit any state and local taxes on Internet access and would extend the existing moratorium (due to expire on October 21, 2001) for five more years until December 31, 2006 on multiple or discriminatory taxes on electronic commerce as provided for in the 1998 Internet Tax Freedom Act (ITFA). We urge you to consider the following reasons why the moratorium should not be extended.

• There is a growing consensus that consumers should not be taxed on their connections to Internet Service Providers (1). However, the five-year continuation of a moratorium on other taxes, such as sales taxes, is inappropriate. There should be no distinction between taxation of goods sold by brick-and-mortar businesses and those sold through the Internet and by mail order. This is not a useful or reasonable distinction. Besides the fact that it puts brick-and-mortar businesses at a competitive disadvantage, it is also discriminatory against, for example, individuals who cannot afford computers to do shopping through the Internet and so must always pay a sales tax on their purchases, while more well-off, computer-literate individuals can avoid most sales taxes.
• While the Internet Tax Freedom Act moratorium did not eliminate the authority of the states to collect sales and use taxes on electronic commerce that were already in place, it is practically very difficult for states to enforce existing Internet sales taxes. State enforcement of "use" or "remote" taxes is made nearly impossible since Supreme Court rulings (2) prohibit states from requiring sellers without a nexus to the state to impose a tax, thus leaving it to individual purchasers to voluntarily claim information on their state tax forms and pay a sales tax.
• The 1998 Internet Tax Freedom Act was linked to creation of a bipartisan national commission to make recommendations. Lacking the required two-thirds agreement, no recommendations have been made. Congress would be better served by concentrating on effective ways that states can collect use taxes under existing law, or assisting states who are already making progress in developing a streamlined approach to sales tax collection, or developing consistent criteria for sales taxes that are not multiple or discriminatory. A continued delay in resolving this issue will significantly penalize states, which have already lost $9.1 billion in sales tax revenues in 2000, according to the General Accounting Office. Given the growth of Internet commerce, this figure will likely double during the next six years. This is especially deleterious at a time when the revenue of many states is not meeting projections and some are experiencing large budget deficits. Most states will also soon be experiencing loss of revenue because of the phasing out and termination of the state estate tax credit under the new tax cuts enacted by Congress earlier this year. The current and looming revenue shortfalls will make it even more important for Congress to develop a means for states to implement an enforceable Internet sales tax.
• The sales tax is a highly regressive tax. Accordingly, we believe sales of goods for meeting basic human needs (e.g., food and health related purchases), regardless of the selling venue should not be taxed. We also encourage a requirement that revenue generated through Internet and mail order sales taxes be used by states for improved service delivery and community improvements, as opposed to tax cuts or rebates. Internet sales tax revenue could be a valuable source of state funding for education, fire protection, health, and other critical services.

We believe H.R. 1552 needs significant modification by removing provisions to extend the moratorium on Internet remote taxes. Instead, we urge you to consider provisions that would allow states to enforce and actively collect existing sales tax on Internet purchases. Sincerely, Ellen Taylor Policy Analyst 1Nevertheless, the ITFA definition of "Internet access services" is very broad. Given rapid expansion of the products that are being offered, and may be offered in the future by ISPs, like music, movies, software and other content, this provision also could have the effect of being a huge tax loophole for ISPs and thus ought to be reexamined. 2Quill Corp. v. North Dakota (1992) and National Bellas Hess v. Illinois (1967)