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No New State Internet Taxes - Yet

by Mike Godfrey,, New York

07 November 2001

After the US federal moratorium on new e-taxes expired on October 21st, some observers expected the states to rush through a plethora of new internet taxes while they had the chance, but it doesn't seem to have happened - yet.

The moratorium may still be extended: the House of Representatives passed a measure to extend it another two years, but two Senate measures - one calling for a two-year extension and the other for an extension through June 2002 - have yet to reach a vote. But with Congress involved in other pressing legislation, and held back by anthrax scares, it's unclear when or if the moratorium issue will be taken up again.

There is wide agreement that sooner or later there will have to be a coherent, US-wide approach to taxation of e-commerce, whether or not there is another moratorium. The underlying problem that has to be solved is the treatment of remote e-sales (ie across state lines): the Supreme Court banned taxation of remote sales, not so much on doctrinal grounds as because of its unfeasibility. But sales on the internet are far more likely to be remote than not, so that the inevitable long-term growth of e-commerce will start to eat away at the states' tax-base.

Donald Bruce, an assistant professor at the University of Tennessee's Center for Business and Economic Research, said state and local governments are seeing a rising toll in lost revenues.

"We've estimated the total loss from e-commerce sales alone to be US$13.3 billion this year," Bruce told the E-Commerce Times. "If Congress fails to act on the nexus (tax collection) issue, that number will only increase as overall e-commerce increases."

A study done by Bruce and Tennessee professor William Fox projects that the loss will rise to $54.8 billion by 2011 if changes are not made.

Bruce said e-shopping's rising popularity makes it necessary to ensure that state and local governments get what is owed them, and this can be done without affecting the overall health of e-commerce.

"The fair and equal application of sales and use taxes to all forms of sales -- local and remote -- would not kill e-commerce," Bruce said. "Indeed, taxes are already being collected on some Internet sales, and growth is still strong compared to overall retail sales growth.

"All that state and local governments are asking for is greater authority to collect taxes that are already legally due. This is based on the simple ideal that sales tax liability ought to be determined on the basis of what's being purchased, not on the basis of how it's being purchased."

Frank Shafroth, director of state-federal relations for the National Governors Association, worries that re-imposing the moratorium without addressing the collection issue will only cause more damage to state and city budgets. He notes that the only new Internet-related tax likely to be levied this year is by the federal government, imposing a federal tax on airline tickets to pay for stepped-up security, which applies regardless of whether the ticket was purchased online or over the counter.

In reality, with the pressure of October 21st removed, Congress will probably now get to grips with the underlying issues. “I think in the short run, the expiration of the moratorium is a non-event,” said Tom Steele, co-chairman of the state and local tax group for San Francisco-based law firm Morrison & Foerster. “The real import here is a political one. The expiration of the old act changes the political dynamic of the new one.”

“It’s very likely that this thing (the moratorium) expires and stays expired,” said Stan Sokul, legislative consultant for The Direct Marketing Association, which is pushing for an extension of the moratorium without it being linked to the sales tax issue. “There’s at least a 50-50 chance.”

It's still unknown whether states will begin to impose their own taxes on the internet. Many of them are suffering from revenue shortfalls as the economy turns down, and are required to balance their budgets. “If you are a state and you want more money, Internet access is a very juicy target,” said Grover Norquist, president of the anti-tax group Americans for Tax Reform. “It’s been protected for three years.”

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