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Sales Taxes on the Net Eyed by Congress

BY David Clarke
by David Clarke on 4/3/01.

WASHINGTON -- With the moratorium on Internet sales taxes ending in October, Congress is once again trying to resolve how state sales taxes should be assessed on products bought online.

Three pieces of legislation proposed in the Senate propose two approaches to interstate sales via the Internet: A new uniform system for states to use in assessing sales tax on goods bought through the Internet, and a ban on sales taxes except when the customer and the company are in the same state.

Sen. Byron Dorgan, D-N.D., has proposed a bill that would extend the moratorium to the end of 2005 while encouraging states to agree on a uniform manner of applying a sales tax to all goods. The 3-year moratorium on taxing interstate e-commerce was part of the 1998 Internet Tax Freedom Act.

Under Dorgan's proposed streamlined system, states would create an identical sales tax to be applied to a product whether it was bought at a store, online, through the mail, or over the phone.

A similar bill has been offered by Sen. Ron Wyden, D-Ore., and Sen. Patrick Leahy, D-Vt., although it would extend the moratorium through 2006.

Last session Sen. John McCain, R-Ariz., proposed a bill to extend the moratorium another five years; the bill was never brought to a vote. McCain, chairman of the Commerce Committee, held hearings in March on Internet taxation.

The difference between the Dorgan and Wyden-Leahy bills, according to Kent Lassman of the conservative Citizens for a Sound Economy, is that Dorgan's bill would enforce a streamlined tax system if states agreed upon one, while the Wyden-Leahy proposal guarantees only that it will come up for vote in the Senate.

Frank Shafroth of the National Governors' Association says the Wyden bill is the most likely to make it through the Senate Commerce Committee. Last year a similar bill was passed by the House of Representatives.

Proposing a sales tax ban on all goods sold over the Internet or through the mail, except where the retailer has a physical presence in the buyer's state, are Sen. Judd Gregg, R-N.H., and Sen. Herb Kohl, D-Wis.

"If a business is located out of state and simply ships products to consumers there, it is not part of the local economy," Kohl said. "It should not be subject to taxes and tax collection burdens that support a community not its own." Shafroth said he does not think the bill has "much traction."

Critics of the Gregg-Kohl approach argue that allowing Internet retailers to avoid charging a sales tax, even if they do not have a physical presence in a state, hurts communities that rely on the revenue generated from a state sales tax.

With the increase in online sales, the Gregg-Kohl bill would exacerbate this problem, said Michael Mazerov, a senior policy analyst at the Center on Budget and Policy Priorities, a liberal think tank specializing in low-income issues.

Jerry Terry of the National Taxpayers Union, a conservative group advocating for lower taxes, said the worries about Internet sales taking away from local business are overstated. "Right now there doesn't appear to be a real impact," he said. Terry said both Internet and local retailers have benefited from the recent economic boom.

Any advantage an Internet retailer may gain by not having to enforce a state sales tax is negated by the shipping fees they must charge, according to Terry.

Mazerov counters that the Kohl-Gregg plan also could clear the way for consumers to avoid paying a sales tax, no matter where a retailer is located.

Mazerov said a company like K-Mart could help customers avoid paying a sales tax by separately incorporating its online purchasing division.

He described how customers could go into a store, browse for what they wanted, and then purchase the items online at a computer in the store. Because the customers would be buying the product from a subsidiary with a warehouse in a different state, they would avoid paying the state sales tax.

"Effectively anything purchased, as long the customer is willing to wait for delivery, would be free from sales tax," Mazerov said.

Last September, California Governor Gray Davis vetoed a bill that would have prevented California retailers that created a subsidiary to handle online orders from avoiding a sales tax.