Inconclusive US Senate Hearing On Internet Tax Moratorium

by Mike Godfrey, Tax-News.com, New York

02 August 2001

Opening a Senate Finance Committee hearing on 'Cybershopping and Sales Tax: Finding the Right Mix' yesterday, Chairman Max Baucus (D - Montana) said that he had not made up his mind yet on what to do about the Internet tax moratorium that expires on October 21st, but that at least he was clear the Senate should do something.

"What if nothing is done and the moratorium is allowed to expire?" Mr Baucus asked. "Will the states begin to treat the internet and internet businesses as 'cash cows?' I sincerely hope not."

The Committee examined disagreements between state governments, online retailers and bricks-and-mortar businesses over the question of whether to extend the current freeze on internet access taxes. Several bills have been introduced in both House and Senate, some of them connected with the SSTP (Streamlined Sales Tax Plan) under which a number of states have got together to construct a harmonised sales tax regime which would allow unified taxation of Internet transactions.

The existing moratorium was put in place in 1998 by legislation which also created an E-Commerce Commission to report on what to do when it expired. The Commission held stormy and inconclusive meetings and could not agree on a binding recommendation. A majority of members were in favour of extending the moratorium for five years. None of the speakers yesterday's at yesterday's hearing was against an extension of the moratorium, although there were differing opinions about the length of any extension.

The problem for Congress, and the reason it will probably have to extend the moratorium, is that with up to 9,000 different sales and use tax regimes in place across the nation, it is a simple impossibility to create a structure for Internet sales taxes without a root-and-branch reform of the underlying system. The SSTP is the nearest anyone has gotten so far to a comprehensive reform, and it has originated among where the states, where any reform has got to start from. A further moratorium will allow time for the SSTP or some equivalent initiative to mature.

Michael Greve of the American Enterprise Institute suggested to the hearing that the US should "scrap" its messy system of tax codes and start from scratch, assessing taxes at the origin of a transaction and not at its destination. Other witnesses expressed hope that a consensus could be reached by working within the existing guidelines.

The National Conference of State Legislatures told the hearing it would oppose legislation that imposes new federal mandates on internet commerce taxation, such as a requirement that states use one tax rate for online or catalogue commerce.

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