For months, federal and state lawmakers have been locked in heated debate over whether to allow states to collect taxes on Internet sales. In October, the current three-year moratorium preventing states from taxing such transactions expires. The matter is before Sen. John McCain's, R-Ariz., Commerce, Science, and Transportation Committee.
The Internet sales tax moratorium was established by the 1998 Internet Tax Freedom Act, which also banned Internet access taxes. The moratorium has prevented nearly 7,500 state, city, and county jurisdictions from collecting sales taxes on e-commerce transactions.
Wyoming Gov. Jim Geringer, R, representing the pro-tax National Governors Association (NGA), claimed at a committee hearing in March that rising online sales are shrinking state tax coffers and endangering vital public programs. Congress' General Accounting Office (GAO) predicts that state and local governments will lose $12.5 billion in uncollected taxes by 2003. "The [revenue] crisis is not here," Geringer testified, "but it's coming, and all we're asking for is a judicious partnership that will allow states to proceed on their own."
Brick-and-mortar, or "Main Street" merchants, claim the tax is unfair because they face a competitive disadvantage since they must charge sales taxes while Internet sellers do not. Peter Lowy, founding chairman of the e-Fairness Coalition, whose members include both on and offline retailers, explained that "requiring brick-and-mortar retailers to collect sales taxes while exempting their online competitors is fundamentally unfair." He added that many brick-and-mortars have set up separate e-commerce entities just to avoid state sales tax.
Sen. McCain said at the hearing that while he favored a level playing field for on and offline merchants, he was concerned the fledgling e-commerce industry might be severely weakened by state taxes. Jane Swift, R, lieutenant governor of Massachusetts, agreed. "It would be a grave mistake on our part," she said, "to start taxing Internet commerce before it has even had a chance to establish itself."
Sen. Ron Wyden, D-Ore., has introduced a bill that would allow states whose tax-collection system meets Congress' approval to tax online services and goods. The bill prohibits "discriminatory" taxes on e-commerce sales. Sen. Byron Dorgan, D-N.D., and Rep. Christopher Cox, R-Calif., have introduced a similar bill that would exempt sellers who make less than $5 million in annual sales.
Last year, tax proponents were able to block an attempt to extend the current moratorium for five additional years. Sen. McCain expressed doubts that a compromise could be reached by the October expiration date.