The moratorium on new Internet taxes doesn't expire until October, but lawmakers already are pushing for an extension, even as they try to take the first step toward permitting states to collect sales tax on most Internet transactions.
Several influential lawmakers are drafting a new bill that proposes extending the moratorium for five years and, for the first time, spells out the criteria states must meet in streamlining their sales-tax systems before Congress will address the issue of out-of-state sales-tax collection.
According to a draft of the Internet Non-Discrimination and Sales Tax Simplification Act, the new bill would require states to take specific steps toward simplifying their tax codes, including creation of a one-stop multistate registration for vendors, uniform definitions for all goods and services in the tax base, and a one-rate system for state and local jurisdictions.
Twenty-nine states already are taking these steps in response to the Streamlined State Sales Tax project, which began in 1999. The first round of legislation aimed at making these changes is already before many state legislators, and leading states, such as Wisconsin, could pass it by the end of the year. State advocates agree that at least 20 states would need to be in compliance before Congress would act.
This is unlikely to happen soon given that most states aren't even considering the most contentious issues, such as the one-rate system, which would either raise rates statewide or hurt major metropolitan areas by not doing so.
Representatives from several state associations have said the new bill wouldn't solve an already difficult situation.
"I would find it hard to find anything positive in that bill," says Frank Shafroth, director of state and federal relations for the National Governors Association, which opposes extending the Internet tax moratorium and argues that the way in which the sales tax issue is addressed in the bill does more harm than good.
"If the states jump through all of these hoops, then Congress could consider doing something. Congress could consider doing something today," Shafroth says. "What the bill does say is that the states cannot go to the Supreme Court."
Sponsors of the bill - Sens. Ron Wyden, D-Ore.; Patrick Leahy, D-Vt.; and Rep. Christopher Cox, R-Calif. - also were key backers of the 1998 Internet Tax Freedom Act. The act created a moratorium on new and discriminatory Internet taxes, and was directed at prohibiting taxes on such services as Internet access. It also set up a commission that has become sharply divided over the issue of collecting sales taxes on online purchases.
The issue of state sales taxes isn't directly addressed in the Internet Tax Freedom Act, but nevertheless has become the focal point of debate over Net taxes during the past three years. It continues to divide the technology community, as well as state and local governments, which have different takes on a 1967 Supreme Court ruling that barred states from collecting sales tax on out-of-state companies with no physical presence in the state.
At the time, the ruling applied mostly to catalog companies, but the high court upheld the ruling in 1992, indicating that either an act of Congress or a simplification of the sales-tax system would be a better remedy for updating the law than a Supreme Court ruling.
Internet and catalog merchants argue that the logistics of collecting sales tax for more than 7,500 state and local jurisdictions is an unfair burden. States and local municipalities counter that they stand to lose billions of dollars in sales-tax revenue from online purchases alone.
Wyden said the Internet Tax Freedom Act was intended to extend an olive branch to mayors and governors, even as he expressed doubt about the degree to which lost sales-tax revenue from Internet purchases impacts local governments.
Sponsors of the new bill say it has bipartisan support and is likely to pass, pointing out that a similar bill overwhelmingly passed the House last year.