Honor System

By eweek  |  Posted 2001-09-03 Print this article Print

Honor System

The moratorium blocks states from imposing new taxes, for example, on AOL accounts. It doesnt address online sales taxes because most online purchases are already subject to taxation. The problem for state governments is that when one of their residents buys a product from an out-of-state retailer, the merchant isnt required to collect the sales tax. The burden lies with the consumer, who is supposed to figure out the sales tax on the purchase and send it to the state tax administrator.

Not surprisingly, few consumers have acted as their own tax collectors.

A 1992 U.S. Supreme Court case essentially punted the issue to Congress, where it languished until e-commerce exploded and states began to view the lost tax revenue with impatience. Separate associations of state officials began toiling to simplify the dizzyingly complex tangle of as many as 7,000 sales tax regimes blanketing the country.

It isnt an act of charity. Most Capitol Hill bills dealing with the subject dangled the reward of a congressional nod on out-of-state sales tax collection based on the states efforts to simplify their tax codes.

The House of Representatives this fall is likely to easily pass an extension of the moratorium, but the situation is more difficult in the Senate. The hope of the pro-tax forces was that both houses would pass bills, and a compromise would emerge.

Since early this year, Senators Byron Dorgan, D-N.D., and Ron Wyden, D-Ore., who have different bills addressing the sales tax issue, have met regularly to try to hammer out a compromise. The negotiations were reportedly heated, and several times the two were near an agreement. But they encountered stumbling blocks, with Dorgans approach consistently more favorable to states and Wydens to business.

The latest hurdle appeared within the past few months, when lobbyists introduced the specter of the "business activity tax," charging that states will start taxing out-of-state companies based on their "economic presence" in the state if they can force retailers to collect sales taxes for them. Now, since retailers generally dont collect sales taxes for states where they dont have a physical presence, states have no idea how much business out-of-state companies are doing within their borders. A tally of commercial activity could lead, for example, to income taxes levied against out-of-state companies.

Business representatives — led by Mark Nebergall, president of the Software Finance and Tax Executives Council— pushed lawmakers to spell out a clear standard, preferably based on physical location, determining when states can seek business activity taxes from out-of-state entities.

By the time lawmakers broke for the August recess, passage of the moratorium was transformed from a straightforward and relatively uncontroversial vote to a complex issue involving states rights, interpretations of vague Supreme Court cases and hotly competing interests.

Its back into this tangle that lawmakers will jump this month. Most participants believe the moratorium will be extended for a few more years.

The gridlock over the issue can be blamed on "blatant ignorance on the part of Congress," says Adam Thierer, director of telecommunication studies of the Cato Institute, a conservative think tank. "The majority of members of Congress honestly believe the moratorium bans all taxes involving the Internet, and of course it does not."

The pro-tax camp — of which Thierer is clearly not a member — was up against "a massive education process to get people to support something vastly more complicated than an extension of the moratorium," he says. "Now they have to figure out if there is any way to salvage elements of that plan. . . . [Lawmakers] want to just extend the moratorium, wash their hands of it and pray something happens in the interim to take the issue away."

The NRFs Whitaker says her coalition is still pushing hard to get a compromise rammed through the Senate. "But now," she adds, "its a matter of politics and procedural tactics getting in the way."


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