US Senators Introduce 'New Economy Tax Fairness Act' For Internet Sales

Mike Godfrey, Tax-news.com, Washington

03 April 2001

Last week two US Senators, Judd Gregg (R-NH) and Herb Kohl (D-WI), introduced the 'New Economy Tax Fairness Act' (also know as the NET FAIR Act) to prevent businesses from being forced to collect sales taxes on goods sold via the Internet in states in which they have no physical presence. The legislation codifies a Supreme Court ruling that US states cannot force 'out-of-state' mail order firms to collect sales taxes, claiming that to do so would be an unconstitutional burden on interstate commerce.

In a press statement Senator Kohl explained: 'If a business is located in a state - uses the roads there, impacts the environment there, employs local workers there - it should pay taxes and business fees there, and it should collect sales taxes on products sold there. But if a business is located out of state, and simply ships products to consumers there, it is not part of the local economy. It does not use local services or infrastructure. And it should not be subject to the taxes and tax collection burdens that support a community not its own.'

And in a speech on the Senate floor last Thursday, Senator Gregg argued: 'This legislation does not preempt a state's right to tax commerce; however, it does protect businesses and consumers from unfair taxation on interstate commerce and from what could be a crippling effect on the growth of the new 21st century economy.'

Under the NET FAIR Act, several provisions that would not qualify for a nexus, include:

• order solicitations that are approved and fulfilled outside the state
• the presence of intangible property in the state, such as patents, copyrights, trademarks, logos, securities contracts, money deposits, electronic or digital 'signals' and Web pages
• the use of the Internet to maintain a Web site accessible by customers in a state
• the use of ISPs or other Web hosting services to maintain, take or process orders that are located in the state
• affiliations with people in the state unless the person is an "agent" of the business who meets the 'substantial physical presence standard'
• and the use of independent contractors or representatives for warranties and repairs

Senator Kohl opposed earlier legislation to force mail order companies to collect sales taxes for goods sold in every state on the grounds that it would amount to raising taxes. He said that it would create significant red tape burdens on mail order companies and would cripple the direct marketing business and stagnate future retail growth through the Internet. Senator Kohl argued that if all companies were required to collect sales tax in all states in which they sell, they would be responsible for complying with 7,600 tax jurisdictions and 46 sets of rules, all with unique exemptions and filing requirements.

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