Services & Software

States to vote on Internet taxes

State officials will vote on a plan to simplify tax rates, a move they hope will prompt Congress to permit levying sales taxes for online purchases.

A plan to tax Internet shopping could take a big step forward Wednesday.

Officials from more than half of the 50 states are meeting in Chicago to vote on a plan to simplify tax rates, a move that state governments hope will prompt Congress to permit levying sales taxes on online purchases.

Last year, Congress extended a moratorium on Internet taxes that expires November 2003. Over the next year, mayors and governors will lobby Congress to permit taxes, while online retailers and free-market groups will ask for another extension on the moratorium.

Americans 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.

The solution, according to the National Governors Association (NGA), is to create a uniform tax-collection mechanism that will make it simpler for Internet and mail-order retailers to collect taxes on shipments. Its proposal, called the Streamlined Sales Tax Project, is designed to overcome objections from opponents that the 7,500 different taxing jurisdictions in the United States have requirements and rules so complicated that they border on byzantine.

The NGA says that "increasing sales over the Internet threaten to significantly compound this revenue loss for states and localities," and the group cites 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 last time around, the Senate rejected a pro-tax amendment by Sen. Michael Enzi, R-Wyo., by a relatively narrow vote of 57-43. During next year's debate over another extension, the NGA hopes that the existence of the Streamlined Sales Tax Project will swing the vote in its favor.

In the last debate, a coalition of groups including the American Electronics Association, the Consumer Electronics Association, the Information Technology Association of America, the National Association of Manufacturers, and the Software and Information Industry Association argued for the moratorium.

Many dot-com and mail-order companies in the United States currently are not required to collect taxes on purchases shipped outside the state. That's because they lack "nexus"--a physical presence or a close tie with the state where the recipient lives--which the U.S. Supreme Court has said is necessary for tax collection to be mandatory.