WATPA: FW: Internet Taxation Moratorium

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From: Norman J. Jacknis (norm@jacknis.com)
Date: Sun Oct 21 2001 - 22:28:31 EDT


This past July, we attempted to lay out the basics behind the Internet
tax policy debates currently being played out in the U.S.
(http://www.ombwatch.org/npt/nptalk/jul2001/intnttx1.html). Here's a
short recap...

Most states have, among other things, a myriad of taxing mechanisms for
sales and use of products. Many of the 45 states that have traditional
sales taxes (along with the District of Columbia) have simply not chosen
to enforce sales taxes online because of the logistical and technical
difficulties they face in doing so. Sales taxes, for example, from
"bricks-and-mortar" are collected by businesses and passed on to a state
treasury. If, however, sales are made by a business in another state
(think mail-order, for example) the state from which the purchaser makes
his payment is limited in how they can collect the tax from the seller.
There are also issues with respect to Internet-based vs. Internet-related
products, especially those that entail a combination of telephone, cable,
or other telecommunications mechanisms that are taxed (while some online
services are not). In short, online retailers are perceived to have an
advantage over traditional retailers.

This might not be such a big deal, except when you consider Americans
are expected to spend as much as US$100 billion through online
transactions over the next two years. Though an exact figure is still
too difficult to gauge, states and localities are expected to lose out
on as much as US$440 billion by 2011. There is a whole range of
arguments for and against different forms of taxes, much less the notion
of taxation itself. The two points to remember are that tax revenue is
used for a range of services from which citizens directly or indirectly
benefit-- in ways not often acknowledged or always easily witnessed, and
that any removal of tax revenue has a ripple effect somewhere else.

As a means of addressing these disparities, Congress passed the Internet
Tax Freedom Act (http://www.house.gov/chriscox/nettax/lawsums.html) in
1998. The ITFA did five things:

stated that no federal tax would be placed on the Internet;

declared the Internet a "tariff-free zone", the protection of which
  was to be monitored by the U.S. Department of Commerce;

placed a national three-year moratorium on Internet-specific taxes
  (such as any monthly access charges to ISPs), except for those states
  that were looking at ways to levy such fees prior to 10/1/98
  (Connecticut, Iowa, New Mexico, North Dakota, Ohio, South Carolina,
   South Dakota, Tennessee, Texas, and Wisconsin);

placed a three-year moratorium on electronic commerce taxes levied by
  state and local governments, preventing them from (1) requiring taxes
  to be collected by sellers from buyers across state lines; (2) imposing
  taxes on goods and services offered exclusively over the Internet;
  and (3) implementing new taxes on out-of-state businesses involved in
  e-commerce transactions;

created a temporary advisory commission to review e-commerce tax
  issues, and make recommendations by Spring 2000 on whether, and how,
  e-commerce should be taxed in a non-discriminatory manner.

In mid-May 2000, the U.S. House of Representatives voted, without any
prior hearings, to extend the federal moratorium on Internet-related
taxes until 10/1/06-- well in advance of the moratorium's original
deadline of October 2001. The current moratorium-- and the 2000 House
vote-- was viewed as problematic, because while it did not prevent
goods and services sold online, they also did not provide guidance or a
constitutionally permissible grounds for doing so, in the wake of a few
key Supreme Court rulings which have made states hesitant about taxing
online commercial activities-- even within their own borders.

Since spring of 2000, the U.S. Senate has resisted efforts to extend the
moratorium by as little as one year and as much as five years, but has
been considering proposals that would at least offer guidance to state
and local governments as to what taxation

The current moratorium is set to expire on October 21, 2001. On 10/10/01,
the House Judiciary Committee was expected to approve legislation that
would have extended the ban on taxes related to Internet services for
five years, placed a permanent ban on taxes related to Internet access,
and provided guidance to the state on ways to streamline interstate tax
collection. Instead, it approved only a two-year extension of the ban
(until 11/1/03) on Internet service taxes (a position now endorsed by
the National Conference of State Legislatures, National Association of
Manufacturers, and U.S. Chamber of Commerce, but not by the National
Governors Association), a two year ban on taxes related to Internet
access, and allowed states already levying access fees to continue to
do so. It did not, however, include language to help states streamline
remote sales tax collection (favored by the National Governors

On 10/16/01 the House passed the Judiciary Committee bill on 10/16/01.
The Bush Administration has signaled that it would support the House
version, despite a preference for a five-year extension. There is,
however, still no clear-cut approach that has gained the support of
the Senate, in part because there are questions around committee
jurisdiction between the Commerce and Finance committees.

The concern is that after the deadline has passed, states and
municipalities might begin to issue taxes in an uncoordinated manner
at best, and in a reckless or unfettered manner at worst. Given the
setbacks stemming from the September 11, 2001 terrorist attacks, the
delay in passing the 13 annual appropriations bills, and the closing
of Senate offices for several days due to anthrax concerns, there is
no definite Senate solution certain to be passed by then.

More to follow...

Ryan Turner
OMB Watch

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