The Zero Percent Stalemate

Congress likely to defer decision on net taxes

The battle over Internet taxes prompted the creation of a high-profile commission, numerous studies, scores of congressional debates, tough behind-the-scenes Capitol Hill politicking and the most serious attempt ever by states to simplify their sales tax structures.

But it appears likely the various partisans engaged in the more than 2-year-old war surrounding online sales taxes will have to call it a draw — for now.

With about seven weeks for Congress to pass legislation before the current moratorium on new or discriminatory Internet taxes expires, the debate about sales taxes has grown too muddy — and partisans have dug too deep — for either side to snatch a victory, lobbyists and tax experts say.

Still, anything is possible. Capitol Hill negotiations will likely go down to the wire, and as congressional leaders haggle to win approval for their pet projects and start horse-trading legislation, surprises often result. Lawmakers could fail to extend the relatively uncontroversial moratorium, though its expiration would have little impact on Internet business as no states are currently poised to start taxing the various pieces of the online pie.

The most likely outcome, however, will be a simple extension ofthe moratorium for several years.

As a result, the issue of whether states should have the right to force out-of-state retailers to collect sales taxes for them will live on until the next moratorium expires — or is extended again — fattening the wallets of lobbyists and confusing e-businesses, politicians and the public.

"There is no way to get to the elusive win-win at this point in time anyway," says Joe Crosby, legislative director of the Committee on State Taxation, a trade organization representing corporate tax interests. "The debate, despite the fact that it is, in essence, 30-some years old, continues to mature, and it is not yet ripe for congressional action."

The National Conference of State Legislatures has been a leader in the pro-tax movement, but even that group recently began backing away from its previously strident call for congressional action. Now, it endorses a simple extension of the moratorium, for as long as four more years.

"Time is running out," says Neal Osten, the NCSLs director of commerce and communications. "There are some major issues to be dealt with that are not going away."

Osten says his group favors the four-year extension — as opposed to a much shorter extension that other groups like the National Retail Federation might be willing to swallow — in part because the Bush administration has made it clear to key lawmakers that it does not want the issue to surface again until after the 2004 election.

The NCSLs embrace of the longer moratorium is "a weak response," says Sarah Whitaker, director of government relations of the NRF, which also favors e-commerce taxation. "The NCSL and the states have a lot to gain from this. And for them backing out and not negotiating, theyre just not getting in the game and thats too bad."

For more than a year, groups and lawmakers pushing for state authority to harvest online sales taxes have tied passage of sales tax legislation to the online tax moratorium. Deal with the sales tax issue, the state groups demanded, or we wont sign off on the Net tax moratorium, which is separate from the sales tax issue.