
Internet Tax Moratorium Passes House
by Guest Blogger, 7/9/2002
On May 10, 2000, the House voted 352-75 to extend a moratorium on Internet-specific taxes for five years, until Oct. 1, 2006 (H.R. 3709).
Supporters of the bill argued that the moratorium is
not about sales taxes. Rather, it would prohibit the imposition of
new taxes on access to the Internet and prevent "multiple" or "discriminatory" taxes on Internet use. While technically
correct, this is misleading. While states can still impose a sales tax,
their ability to enforce an Internet sales tax has been greatly eroded by Supreme Court decisions. Federal legislation is needed to help states create an even playing field between bricks-and-mortar and Internet businesses. Instead, the House bill further discourages states from finding solutions, leaving bricks-and-mortar businesses at a competitive disadvantage and limiting government resources for state and local services.
The House bill is an extension of the 1998 Internet Tax
Freedom Act which
prohibited taxing access to Internet Service Providers, such
as AOL, and
prevented certain "discriminatory" and "multiple" state and
local taxes
until October 1, 2001 -- 17 months from now. The law was
linked to
creation of a bipartisan national commission to study tax
and access issues
and make recommendations. However, the commission was
unable to reach
agreement on how to handle Internet taxes as it lacked the
two-thirds
required by Congress to make a recommendation. Since the
moratorium
doesn't expire for another 17 months and the bipartisan
commission did not
reach agreement on limiting Internet sales tax, there is no
need for the
House bill to extend the moratorium for five more years.
More importantly, while there is growing consensus that
consumers should not
be taxed on their
connections to Internet Service Providers, the House bill
has language
that presents several problems in this regard. But the
heart of the problem is in the
moratorium on the other taxes.
Forty-five states already impose sales tax on goods and some
services. For
those sales made from a store located in a state, the consumer pays
a sales tax and
the store forwards the money to the state. For those sales
made from a
business in another state -- whether through mail order or
the Internet --
the state has limited authority to require the seller to
remit the sales
tax to the state. A 1992 Supreme Court decision (Quill
Corp. vs. North
Dakota), combined with a 1967 decision (National Bellas Hess
vs. Illinois),
made clear that states cannot require sellers without a
"nexus" to the
state (e.g., out of state) to impose a tax. So consumers
are supposed to
fill out information on their state tax forms about goods
they bought from
other states and pay a sales tax on those items. But state
enforcement of
these "use" or "remote" taxes is nearly impossible.
H.R. 3709's limitation on "multiple" or "discriminatory"
taxes does a
disservice. Instead of offering ways in which states can
collect use taxes
or encouraging states to develop a streamlined approach to
sales tax
collections, the House bill discourages states to find
solutions until the
moratorium is over. In the Internet age, six more years is
a life time.
Rep. Bill Delahunt (D-MA) offered a compromise to extend the
current
moratorium, which expires October 1, 2001, by two years. This
would send a message to state and local governments to
develop a workable
solution for sales and use-tax systems. The compromise was
defeated.
A non-binding resolution offered by Rep. Ernest Istook
(R-OK) was passed
(289-138) that provides a description of what states need to
do to impose a
sales tax that would not be "multiple" or "discriminatory."
The provision
identifies 14 characteristics, such as that
there should be a
centralized, one-step, multi-state registration system for
sellers, and
there should be uniform definitions for good and services
across states.
OMB Watch supports removing the
distinction between
taxation of goods sold by bricks-and-mortar facilities and
those sold
through the Internet and mail order mechanisms. However, we
believe sales
of goods for meeting basic human needs (e.g., food and
health related
purchases), regardless of the selling vehicle, should not be
taxed. We
recognize that the sales tax is a highly regressive tax.
Accordingly, we
encourage that revenues generated through Internet and mail
order sales
tax be used by states for improved service delivery and
community
improvements; they should not be used for tax cuts or
rebates.
Members of both parties are trying to demonstrate that they
are friendly to
technology companies, believing that such players represent
key swing
voters in the November elections. They are in such a rush
to help
technology companies that they are even skipping the hearing
process on a
number of bills. In the case of H.R. 3709, Rep. George
Gekas (R-PA), chair
of the Judiciary Committee's Commercial and Administrative
Law
Subcommittee, announced that he would hold hearings on May
17 to explore
the concerns raised over the bill that passed yesterday.
It remains unclear what will happen in the Senate. A
similar five year
moratorium extension has been encouraged by Sen. John McCain
(R-AZ), but
was slowed down when opponents raised concerns. Sen. Byron
Dorgan (D-ND)
has been developing an approach similar to the Istook
amendment that many
are eager to see. Many are hopeful that the Dorgan approach
will provide a
reasonable approach that will help us move in the direction
of applying
sales tax in a uniform manner regardless of the sales
venue.
