House Approves 5 Year Net Ban Extension

by Mike Godfrey, Tax-News.com, Washington

06 August 2001

On Thursday last week, the US House Judiciary subcommittee approved legislation to permanently ban taxes on Internet access and extend the existing moratorium, under the 1998 Internet Tax Freedom Act (IFTA), barring states from levying 'multiple and discriminatory' Internet taxes for a further five years. However, this is with the exception of the sales tax - an issue which the subcommittee members have chosen to avoid and has caused much controversy in the US.

The bill, sponsored by Rep. Christopher Cox, R-Calif, originally included an amendment that backed the introduction of the online sales tax but it was defeated when subcommittee chairman, Bob Barr R-GA, ruled that the priority was to address the extension of the moratorium before it expired in October and he considered the sales tax issue irrelevant to the bill in question. He explained to reporters: 'I think that any effort to encumber a clean moratorium right now would slow it down and possibly kill it and I think that would be irresponsible.'

The current legislation governing online sales taxes stems from a 1992 Supreme Court decision which states that unless a business has a physical presence in a state, the state can not obligate the business to collect the sales tax. G. Thomas Woodward, assistant director for tax analysis for the Congressional Budget Office, has argued that such revenue 'erosion could be large enough to compel many states to choose between reducing spending or seeking new revenue through higher tax rates or new taxes.' Many state governors have complained at this loss of revenue and have unsuccessfully, so far at least, failed in their attempts to persuade the government to allow them to set up a compact to collect sales taxes.

The National Retail Federation (NRF), the world's largest retail association, has also complained bitterly over the subcommittee's failure to address the issue. Its argument is that most Internet and mail-order purchases escape state sales taxes and this is unfair for many retailers. NRF Vice President for Government and Industry Affairs Scott Cahill explained: 'If the ITFA is reauthorized without addressing the sales tax issue, this issue may never be addressed and Internet and mail-order sellers will continue to have a government-sanctioned price advantage over Main Street retailers for years to come. That is unfair not just for local retailers but the state and local governments that count on them for tax revenue and the countless community groups that depend on them for support of everything from little league to charities.'

He added: 'In an industry with profit margins as narrow as they are in retail, the lack of sales tax is a significant price advantage. Consumers should pick winners and losers based on selection, service and convenience — tax policy should not provide one retailers with a pricing advantage over another. The time has come to level the playing field.'

The three-year moratorium imposed under ITFA in 1998 affected only special taxes that would apply only to the Internet, such as access or bandwidth taxes. Most Internet and mail-order companies were already exempt from collecting sales tax from out-of-state customers under the 1992 Supreme Court ruling. The rapid growth of on-line commerce has nonetheless made sales tax an issue during Congress's debate over ITFA reauthorization.

But it's not over yet. On an optimistic note, Rep. Barr claimed that the issue should be considered on its own merits as he said 'there's nothing at all stopping us from moving forward with consideration of other legislation, it just doesn't have to be tied to this legislation.' And North Carolina Rep. and subcommittee member, Mel Watt, has pledged to re-introduce the sales tax amendment when the full Judiciary Committee considers the bill after the August recess. The Democrat is optimistic that the Committee will be more amenable to the sales tax as he said of the subcommittee's decision - 'this is a minor-league trial period, we get to go to the major leagues next.'

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