Use Tax at Center of Net Tax Debate

Tax collection issue must be worked out before new Internet taxes can be discussed, states say

The issue of new internet sales taxes is moving slowly but steadily on a predictable trajectory that is likely to result in a completely new structure within several years.

The next milestone for the issue is the probable extension of the current "moratorium on multiple and discriminatory taxes" on Internet commerce, which will expire Oct. 21. Members of the U.S. House of Representatives and Senate reconvene this week to discuss extending the moratorium five years.

That extension, however, according to Washington insiders, will be in tandem with continuing discussions over the simplification of local sales taxes.

States have been working in concert to simplify their sales taxes for the better part of two years. The Streamlined Sales Tax Project, a group consisting of 38 states, crafted draft legislation earlier this year to update and simplify sales and use tax collection and administration. But the task of getting such drafts passed in each state government is daunting, as there are some 7,600 taxing jurisdictions in the United States, including states, counties and municipalities.

Theres also a significant difference of opinion as to whether tangible goods and things distributed electronically ought to be taxed the same way. Also contentious is how to classify goods. For example, said Karl Freiden, an analyst at Arthur Andersen, in Cambridge, Mass., should candy be counted as a food, and are shoelaces clothing or accessories?

Nevertheless, simplifying the tax code will pave the way for the collection of so-called use taxes. Use taxes are imposed on people who buy things from companies outside their state. But since the number and complexity of local sales tax codes make this impractical, most of these taxes go unpaid.

One organization that favors their eventual collection is the e-Fairness Coalition, which represents real estate and retail interests, including Wal-mart, The Gap and others.

"We think there should be federal legislation that lays out clear guidelines to the states to simplify their tax systems," said Lisa Cowell, executive director of e-Fairness in Washington. "Once Congress is satisfied the states have simplified, then they should be able to ask that all retailers collect [use taxes]." Cowell added her group favors an extension of the moratorium, but only if efforts to streamline local sales taxes are made.

The Bush administration, for its part, favors extending the moratorium, as well as enacting a permanent ban on Internet access taxes.

"President Bush has called for a five-year extension of the existing moratorium," said Bruce Mehlman, assistant secretary of commerce for technology policy in the Bush administration. "Any neutral observer would applaud the simplification of taxes," he added.

Mark Nebergall, president of the Internet Tax Fairness Coalition, a software industry group in Washington, said his organization also favors extending the moratorium. The discussions on tax simplification are not far enough along," Nebergall said.

With so many voices in favor of extending the moratorium, passage of such legislation, followed by several more years of tax simplification talks, is likely, according to analyst Frieden.