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A Senate committee voted today to create a permanent ban on discriminatory Internet taxes and Internet access taxes. The committee-approved legislation, which mirrors a bill passed by a House committee earlier this month, paves the way for Congress to extend the Internet tax moratorium due to expire Nov. 1.
Industry officials caution that if the ban is not at least extended before it expires, Internet retailers could be inundated with an array of new taxes from thousands of state and local taxing authorities.
As illustrated by the committees votes, lawmakers overseeing telecommunications are wary of Internet taxes and the potentially chilling effect they could have on e-commerce. Congress has temporarily extended the access tax moratorium twice before, but this year it faces mounting pressure from the states looking for new revenues in the sluggish economy. Members of Congress who do not regularly deal with technology may be more sympathetic to the states, and the legislation is likely to face some resistance as the issue moves toward floor votes.
Sure to incite resistance is a provision in the Senate bill that would put an end to state and local access taxes that were in place prior to the original federal moratorium in 1998. The moratorium, as it still stands today, grandfathered those states, but the pending bill would sunset the grandfather provision in three years.
The pending bills do not address non-discriminatory Internet sales taxes, which a state can collect only if the online retailer has a store or other facility located in the state. Per a Supreme Court decision, if states simplify and unify their complex tax structures, they will be permitted to collect remote sales tax even when the retailer does not have a physical presence in the state. The remote sales tax ban applies to mail-order and telephone sales as well.
The states are lobbying Congress to authorize them to collect such taxes in exchange for maintaining the moratorium on access taxes, arguing that traditional retailers are hurt by online sales and that the disparate tax regimes are discriminatory. However, key lawmakers have said that they want to keep the two tax issues separate. Senate Commerce Committee Chairman John McCain, R-Ariz., said the committee plans to hold hearings on the sales tax issue later this year.