Internet tax ban to expire after Congress fails to give extension
WASHINGTON (AP) – A ban on taxes that target the Internet will expire this weekend. Congress declined to pass an extension Thursday, mired in a dispute over how state sales taxes should apply to billions of dollars in e-commerce.
Analysts and lawmakers say it’s unlikely that state and local governments will rush to impose Internet taxes after the moratorium expires Sunday. But given enough time and an increasing need to raise revenue, that could change.
”Starting Monday, there’s an opportunity for considerable economic mischief,” said Sen. Ron Wyden, D-Ore.
Unlike brick and mortar competitors, businesses engaged in e-commerce have benefited from not having to pay state and federal taxes on money earned from online transactions. The moratorium also has prevented online consumers from possibly paying taxes on their Internet access accounts.
There is concern that tax officials around the country could begin interpreting a variety of their current tax laws as applying to the Internet. Some lawmakers say that would drag down a key economic engine, adding to the nation’s economic woes.
”This is no time for Congress to permit a new onslaught of taxes on the consumer, or on the tech sector,” said Rep. Christopher Cox, R-Calif.
The moratorium imposed in 1998 prohibits taxes on Internet access and bans any tax that singles out the Internet. It does not, however, address a more complex issue involving uncollected state sales taxes on electronic commerce estimated at nearly $26 billion in 2000.
Fearing huge future revenue losses, state and local government officials say Congress must use a renewal of the ban to also give them authority to require that out-of-state Internet, catalogue and telephone sellers collect and remit their sales taxes.
The government officials are backed by most traditional retailers, including many of the nation’s largest chains, who say Internet competitors have an unfair advantage.
A state is barred under a Supreme Court decision from forcing an out-of-state business to collect its sales tax unless the business has a physical presence, or ”nexus,” in that state.
Earlier this week, the House passed a straight two-year extension of the current moratorium that did not address the sales tax question. That was blocked in the Senate.
”We ought to deal with both sets of problems at the same time,” said Sen. Byron Dorgan, D-N.D. ”I would object to a two-year moratorium that doesn’t address the second problem.”
But Dorgan failed Thursday to win Senate approval of an extension until June 30 that included nonbinding language encouraging states to continue working on a simplified system to collect taxes on remote sales.
That sealed the moratorium’s fate for the time being. Both houses of Congress are in recess until Tuesday while the Capitol complex is checked for anthrax contamination.
Sales taxes are levied by 45 states and the District of Columbia. Buyers are generally supposed to pay the tax when they purchase something from an out-of-state retailer under current law, but the laws are rarely enforced.
”A lot of mayors and governors don’t want the political heat of collecting those taxes,” Wyden said.
Internet sellers have resisted a new sales tax system unless the current patchwork of tax rates and rules in some 7,500 jurisdictions is replaced by something less burdensome. They also fear being subjected to dozens of other kinds of state taxes and audits, particularly involving corporate taxes.
Sen. Michael Enzi, R-Wyo., said sales tax simplification should result in ”one form, once place to send your check, and one audit.”
Republicans and Democrats insisted Thursday that they would resolve their differences and pass an extension of the moratorium before adjourning for the year. There may be an effort to take up the House-passed two-year extension next week in the Senate and allow votes on a series of sales tax amendments.
”There is an interest on both sides of the aisle to extend the moratorium,” said Senate Minority Whip Don Nickles, R-Okla.
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