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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.
Honor System
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.”