New bill kicks off battle over Internet tax moratorium extension

A new push to extend a moratorium on the addition of taxes aimed at e-commerce began in the U.S. Congress last week. But since the three-year moratorium took effect in late 1998, state governments and many large companies have been organizing to challenge the notion that the Internet should be a tax-free zone.

The two lawmakers who championed the initial moratorium, Sen. Ron Wyden (D-Ore.) and Rep. Christopher Cox (R-Calif.), last Thursday introduced legislation that would extend the ban on "new and discriminatory" Internet taxes -- meaning ones that single out e-commerce transactions -- for another five years beyond its scheduled expiration in October.

The Cox-Wyden legislation wouldn't specifically prevent states from attempting to collect sales taxes from pure-play online retailers that are located elsewhere. But critics said they want Congress to acknowledge as part of any new moratorium bill that states should have the ability to compel those companies to gather and pass along sales taxes.

Under two earlier rulings by the U.S. Supreme Court, a state is barred from forcing an online retailer to collect sales taxes unless the company has a physical presence in that particular state. Congress could change that restriction, which is a big bone of contention among large brick-and-mortar retailers that have to collect taxes on in-store sales and on many online transactions because of their far-flung operations in numerous states.

As filed by Wyden and Cox, the new legislation "falls far short of what we are looking for," said James Goldberg, Washington counsel at the North American Retail Dealers Association (NARDA), a Lombard, Ill.-based trade group that claims the current sales tax system is unfair to companies with widespread brick-and-mortar locations.

What NARDA wants, Goldberg said, is a "comprehensive solution" to the Internet tax issue that will "level the playing field" for all businesses. A similar position is espoused by the E-Fairness Coalition, a Washington-based lobbying organization that includes NARDA, other retail trade associations and individual companies such as Wal-Mart Stores Inc., Kmart Corp. and Circuit City Stores Inc.

But others argued that the brick-and-mortar retailers are the ones that are seeking an edge in the tax debate.

Bentonville, Ark.-based Wal-Mart and its allies "would prefer to load up the [pure-play online retailers] with as much administrative burden as they can, so they can gain a competitive advantage," said Mark Nebergall, president of the Software Finance and Tax Executives Council, a Washington-based association of software vendors and IT consulting firms that supports the moratorium on new Internet taxes.

A key argument of moratorium backers is the complexity of requiring all online retailers to collect sales taxes. They point out that there are some 7,500 different taxing jurisdictions nationally and that definitions about what is a taxable product vary widely.

Even some proponents of wider sales tax collections, including officials in 31 states that are working on a tax simplification project, acknowledged that the rules would have to be streamlined to make it easier for companies to comply with new collection requirements. And many state officials have said that the current sales tax system is ill-suited for e-commerce.

But, Goldberg said, Congress should include a provision in any moratorium extension that would lead to a consideration of expanded sales tax collections if a certain number of states implement simplified rules. The Cox-Wyden legislation currently "does not mandate a procedure or trigger point for Congress to take action," he added.

Some states are also looking to technology as a way to lessen the tax-collection burden on companies that do business via the Web. For example, Charles Collins, director of the sales and use tax division at the North Carolina Department of Revenue, is leading an effort to develop a new system that's aimed at automating sales tax collections.

Collins said three technology vendors -- Taxware International Inc. in Salem, Mass.; Pitney Bowes Inc. in Stamford, Conn.; and Esalestax.com Inc. in Englewood, Colo. -- are about a month away from launching a pilot version of the system with a number of retailers. The companies would use the system to collect taxes and then remit them to the appropriate states, he said.

Frank Shafroth, a policy expert at the National Governors Association in Washington, said the Cox-Wyden legislation has some big problems that his group would like to see addressed. A current ban on Internet access taxes could ultimately exempt sales taxes on "bundled" goods that are shipped electronically, such as music recordings, he said.

Moreover, Shafroth said the current version of the bill would block states from launching legal challenges to earlier court rulings that thus far have stymied their efforts to force remote sellers to collect sales taxes. He predicted that legislation to extend the moratorium, which was approved in the U.S. House but stalled in the Senate last year, will have trouble again this year unless it includes a compromise on some of the issues raised by critics.

Other moratorium-related bills also are likely in addition to the one filed last week. For example, one measure that may be reintroduced this year is a proposal by Sen. Byron Dorgan (D-N.D.), who last year sought to extend the moratorium with a bill that would have given states the ability to collect taxes from remote online retailers.

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