Congress weighs ban on Net taxes

With the current moratorium approaching its expiration date, a duo of legislators is again trying to enact a permanent ban of sales tax on interstate purchases made via the Net.

Declan McCullagh Former Senior Writer
Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.
Declan McCullagh
3 min read
A debate in Congress over how to tax the Internet began Wednesday with the latest effort to permanently prevent such fees.

Rep. Chris Cox, R-Calif., and Sen. Ron Wyden, D-Ore., introduced a bill called the Internet Tax Non-Discrimination Act, renewing their efforts to transform what is currently a moratorium on Internet sales taxes into an outright ban.

"We have had ample time to evaluate the effects of the moratorium on Internet taxes--on the growth of the online economy in general and e-commerce in particular," Cox said in a statement. "Given the continued softness in the tech economy, this is hardly the time for new taxes on the Internet. Rather, providing long-term certainty about tax policy is one of the necessary ingredients for a tech rebound."

A Cox and Wyden penned moratorium prohibiting states from collecting Internet taxes went into effect in 1998 and was extended in 2001 by other legislation authored by the team (which also bears the Non-Discrimination moniker). With that extension set to expire in November, the next 10 months will see Congress besieged by mayors and governors lobbying for the power to levy taxes and online retailers and free-market groups pushing for Cox and Wyden's ban or another extension of the moratorium.

Americans generally are supposed to pay taxes voluntarily on items they order from Web sites and mail-order companies that are located out of the state in which they live. But very few people ante up, and state officials have griped for years about what they view as billions of dollars a year in lost revenue.

"Increasing sales over the Internet threaten to significantly compound this revenue loss for states and localities," the National Governors Association has said, citing a University of Tennessee study that projected state revenue losses from Internet sales would reach $45 billion by 2006 and nearly $55 billion by 2011.

The NGA has been pitching a proposal designed to overcome objections from Net-tax opponents who say that the Byzantine requirements and rules of the 7,500 different taxing jurisdictions in the United States would create a nightmare for businesses. The NGA says its Streamlined Sales Tax Project would lead to a uniform tax-collection mechanism that would make it simpler for Internet and mail-order retailers to collect taxes on shipments.

The last time around, the Senate rejected a pro-tax amendment penned by Sen. Michael Enzi, R-Wyo., with a relatively close vote of 57-43. During this year's expected debate over a ban or another extension of the moratorium, the NGA hopes that the existence of the Streamlined Sales Tax Project will swing the vote in its favor.

Adam Thierer, an analyst at the free-market Cato Institute who opposes the NGA's plan, says he fears it will succeed. "I think the states will win over Republicans and get their way at some point," Thierer said.

A 1992 U.S. Supreme Court case, Quill Corp. v. North Dakota, created a high barrier to states trying to tax shipments from another jurisdiction. The court said North Dakota could not force an out-of-state retailer to collect taxes on purchases sent to residents of North Dakota.

But in a majority opinion written by Justice John Paul Stevens, the court took pains to point out that Congress had the power to enact a federal law that would effectively override the justices' decision.

"This aspect of our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve," the court said.