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Bureau of National Affairs

No. 220
Friday November 16, 2001 Page GG-1
ISSN 1523-567X
Lead Tax Report 

Electronic Commerce:
Senate Passes, Sends President Bush
Bill Extending Internet Tax Moratorium

The Senate Nov. 15 approved and cleared for President Bush's certain signature a House-passed bill (H.R. 1552) that would extend by two years the moratorium on the taxation of Internet sales that expired Oct. 21.

The voice vote approving the two-year moratorium extension came after the Senate tabled, 57-43 vote, an amendment by Sens. Byron Dorgan (D-N.D.), Mike Enzi (R-Wyo.), and others that could have paved the way for states and local governments in the future to collect sales and use taxes on remote online sales.

Instead, the two-year moratorium extension now goes to the White House, which issued a statement expressing strong support for the House-passed two-year extension (199 DTR GG-1, 10/17/01). After the Senate passed the bill, Sen. John McCain (R-Ariz.) urged that meetings be held "as soon as possible" on resolving the issue of lost state and local tax revenue due to Internet sales.

Senate Finance Committee Chairman Max Baucus (D-Mont.), who opposed the Dorgan-Enzi substitute, called the two-year moratorium extension "a reasonable, bipartisan compromise" while talks continue on how to address state and local government concerns about lost sales tax revenues resulting from online sales.

However, Baucus also urged that the new extension not end up being one in a long line of temporary extensions with Congress failing to address those state and local concerns. He said neither his committee nor any other Senate panel had held any hearings on the substitute proposal and had not gotten any testimony from experts on the impact of the proposal.

Sen. Ron Wyden (R-Ore.), who opposed the Dorgan-Enzi substitute, argued that "millions of Americans could be hit with new taxes just by clicking on a Web page" in the future and that some of those taxes could be retroactive to 1998 if the substitute became law. "The substitute creates new opportunities for economic mischief" because it would let "every tax jurisdiction impose new taxes on the Internet" under certain conditions, Wyden said.

Sen. Barbara Boxer (D-Calif.) said the substitute "would allow taxes on Internet content," which she said "is a very dangerous kind of an amendment because if it does become law, it will wreak havoc on the Internet."

However, sponsors of the tabled substitute defended their plan, which would give states an opportunity to develop a more streamlined system for the collection and distribution of sales and uses taxes stemming from online sales if Congress approved the plan.

"This is not a debate about a new tax," Dorgan said in defense of his amendment. ... We want to solve another problem that is out there festering and growing and it is not a problem that deals with a new tax. Anybody who talks about that is dead wrong." He said it has been estimated that $13 billion in state and local sales and use taxes would be lost this year and that about $45 billion in those taxes would be lost by 2006. Much of that money would have gone into education accounts, he said.

Substitute Would Allow Collection Proposal

Dorgan said his amendment would have let a group of at least 20 states submit a proposal to Congress on a way to collect taxes on Internet sales. He said it would "require state and local governments to make dramatic simplifications in their tax systems" and that "when they do, through a compact, submit that compact to the Congress for approval or disapproval."

If Congress approved the state compact, it would allow states to "require remote sellers to collect the tax that is already owed on the transaction" but which is not now paid. "This substitute by itself doesn't solve the problem," Dorgan said. "But we have two choices. We can decide to ignore this problem and do nothing but you know and I know it will not go away."

Among other things, the Dorgan-Enzi substitute amendment would have:

    Provided a permanent extension of the moratorium on Internet access taxes and extended the moratorium on multiple and discriminatory taxes for four years, through Dec. 31, 3005.

    Encouraged states to simplify their sales and use tax collection systems so that there is a centralized multi-state registration system for sellers, established uniform definitions for items sold and for exempt items, and created uniform auditing procedures and remittance forms, among other things.

    Provided that once 20 states have developed and adopted an Interstate Simplified Sales and Use Tax Compact, they would submit it to Congress for approval within 120 days on a "fast track" procedure. If Congress approved the compact, the states that are part of the compact could then require Internet sellers to collect sales and use taxes that are not currently collected.

    Allowed states to use either a single, blended use tax rate for all remote sales or allowed states to require the collection of the actual state and local sales or use taxes due on each sale.

    Recommended that state and local governments and the business community study the cost to all sellers of collecting and remitting state and local sales and use taxes with the results of the study used to set a vendor collection allowance.

    Texts of the summary and amendment by Enzi are in BNA TaxCore.

By Bud Newman

Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C.

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