Free Lunch Ending?

Congress wrangles over Net tax

Compromise is in the air on Capitol Hill, and the end of duty-free online shopping could be near.

The debate about whether to let states tax electronic commerce has grown more intense in the past six months. Potent pro-tax lobbying forces like the National Retail Federation have waded into the fray, and state and local governments are making the issue a priority as overall tax revenues dwindle because of the economic downturn.

Congress also faces a deadline on the issue: The three-year moratorium on new Internet taxation will end in October.

Last week, Sen. Ron Wyden, D-Ore., and Rep. Chris Cox, R-Calif., jointly introduced legislation that would give states taxing authority over online sales, provided they simplify the daunting thicket of sales-tax regimes blanketing the country.

Meanwhile, Sen. John McCain, R-Ariz., chairman of the powerful Senate Commerce Committee, has been meeting with online tax champion Sen. Byron Dorgan, D-N.D., to "try to come together on this issue," said Pia Pialorsi, McCains press secretary. McCain is holding off on introducing his own tax bill, she said, "because it is such an important issue; we cannot risk not having consensus."

McCain is noncommittal about Net taxes. He is seeking input from all interested parties and plans to hold the first hearing in early spring, Pialorsi said.

Barry Piatt, Dorgans press secretary, said Dorgan intends to introduce legislation that would let states tax online commerce; Dorgan and McCain have been talking "to see if there is a patch of earth they can both stand on."

In the House of Representatives, the message is more blunt.

"There aint no free lunches," said Ken Johnson, press secretary for House Commerce Committee Chairman Rep. Billy Tauzin, R-La. "At some point we have to address the issue of parity. Otherwise local and state governments are going to find themselves in a big bind, unable to provide services to their citizens because of an erosion of their tax bases."

At issue is not the Internet Tax Moratorium, which was passed in 1998. Both sides of the debate are willing to extend the moratorium, which forbids the imposition of new or discriminatory taxes on the Internet. Most agree that a failure to extend the moratorium could lead to a host of new state-imposed Net taxes. Whats at stake are existing sales and use taxes that states currently dont collect from online sales. To pass the all-important moratorium, those inclined against new taxes may have to compromise on these, sources said.

A 1992 Supreme Court decision, Quill v. North Dakota, concluded that states are technically due a sales tax when one of their citizens buys something remotely — in this case, through a catalog — from another state. The court, however, ruled that it would be too burdensome to force merchants selling remotely to navigate the estimated 7,000 different U.S. sales taxes.

The court threw the issue back in Congress lap, where it lay dormant until the rise of Internet commerce. Most players agree that lawmakers will have to make a decision about sales and use taxes — similar to a sales tax — before the fall.

The pro-tax forces will be met by big e-tailers, such as AOL Time Warner and Gateway, and by conservatives like Grover Norquist, director of Americans for Tax Reform and an influential Republican partisan. "Its a terrible idea to allow politicians in Louisiana to impose taxes on Texas or New York [businesses]," Norquist said. "There is no limit to the amount of damage a Louisiana politician will do to a New York business."

Given the relatively small percentage of retail activity that takes place online, any state official who pushes for e-commerce taxation, Norquist added, "is a politician who says I cannot even think of reducing spending."