In October of 1998, Congress voted the Internet Tax Freedom Act into law. The law established a three-year moratorium on new Internet access taxes and on multiple or discriminatory taxes on electronic commerce. However, the legislation did not prevent states and localities from collecting existing sales tax on purchases made over the Internet. As it stands now, Internet retailers are subject to the same sales taxes as mail-order retailers. This means, if the seller has a physical nexus in a state (a store, a warehouse or office) then the seller must collect state and local taxes. If the seller does not have a physical nexus in the state the consumer is responsible for paying the tax directly to the state. Few consumers do. In fact, in 1999, according to Forrester Research, more than half a billion dollars in sales taxes were not collected on Internet purchases.

The passage of the Internet Tax Freedom Act mandated that an Advisory Commission on Electronic Commerce be formed to recommend solutions to the taxation question. After nearly two-years of meetings, in March of this year the Advisory Commission approved a report that asks Congress to extend the existing ban on Internet taxes for five years and includes a host of tax exemptions favoring high-tech companies. For instance, if Congress adopts this proposal all books, music and software that currently are subject to state and local sales taxes would be tax-free. It is hard to believe it is the intent of the Advisory Commission to erode the tax base of local governments. But that is exactly what will happen if this legislation is passed and consumers choose to purchase via the Internet because they don't have to pay sales tax. Sales taxes account for approximately 49% of state and local government's revenue; revenue that pays for schools, hospitals, roads, police and fire protection. To deny states the ability to collect taxes due on purchases made via the Internet and in the process hurt brick-and-mortar retailers and local communities they serve is wrong.

In May, the United States House of Representatives passed legislation that would extend, for five additional years through October of 2006, the current Internet tax moratorium. The debate has now moved to the Senate where ICSC is working to ensure that the Senate does not pass similar language.

ICSC is working with a coalition of retailers and municipal officials to get the word out that Internet retailers should be responsible for collecting state and local taxes just like brick-and-mortar retailers. With sales taxes accounting for, in some cases, 49% of a state's revenue, ICSC recognizes that sales taxes are vitally important to the financial stability of many communities throughout the nation. Legislation that gives a competitive advantage to one form of retail over another, and has the potential to undermine the ability of local governments to finance their operations is wrong and needs to be corrected.