Internet Taxation Bills

Issue: The amount of uncollected state and local sales tax revenues from out-of-state vendors is estimated to be over $5 billion. This amount will increase geometrically as the Internet becomes more popular and more sales are made over the Internet. Should companies using the Internet be treated the same as "Main Street" retailers who collect sales taxes? Or, should these companies be treated the same as mail order companies who are not required to collect sales taxes on out-of-state sales?

Background: Since early 1997, numerous bills have been introduced in Congress to impose a lengthy moratorium on state and local taxes on the Internet and other forms of electronic commerce. The legislation is promoted by Internet service providers, the direct mail industry and electronic information services. In the original introduced bills, all state and local taxes affecting the Internet were included in the moratorium. A short list of specified state and local income, property and sales taxes were excepted. The bills called for a massive federal preemption of state and local taxes. As questions were raised by different states about language in the bills, the list of exemptions kept changing. The authors of the legislation clearly did not recognize the complexities of state and local taxation.

Despite problems with the legislation and its many rewrites, the Senate Commerce Committee approved the Internet Tax Freedom Act (S.442) in November 1977. The committee agreed to work on amendments before taking it to the Senate floor, Senator Trent Lott (R-Miss.) also stated that whatever version was considered, it had to be acceptable to state and local government.

The House considered similar legislation (H.R. 1054) introduced by Rep. Christopher Cox (R-Calif.). The bill was referred to the House Commerce Committee and the House Judiciary Committee. Earlier this year, Republican governors met with the House Congressional leadership and strongly urged that the moratorium be shorter and only include taxes on Internet access and online services. There would be no preemption of other state and local taxes. In exchange for agreeing to a moratorium, the governors urged creation of a Congressional commission to recommend legislation on the collection of state and local sales taxes by all "remote sellers" (mail order, telephone and Internet). NACo and other state and local government organizations reached agreement with Rep. Cox on the outlines of a new bill which was introduced as an amendment to his earlier bill.

The House Commerce and Judiciary committees approved similar bills in May and June of this year. The two bills were combined into a new bill (H.R. 4105) and passed by the House on June 23. The legislation generally follows the agreement made with Rep. Cox. The House-passed bill provides: A three-year moratorium on new taxes on Internet access and services; the moratorium would not include eight states with existing Internet taxes if states pass a law within one year reaffirming the taxes; an advisory commission would be created (NACo has two members) to study electronic commerce and direct mail sales tax issues; and the commission would have two years to recommend legislation to Congress.

The Senate is expected to consider another version of the Internet Tax Freedom Act in September. The Senate Finance Committee reported amendments to S.442 that are similar to the House-passed bill. NACo is urging that the House-passed bill be used as the legislative vehicle on the Senate floor. It is not clear which version will be considered. It is possible that the Senate may not take up the legislation if the issue continues to be ontentious and time consuming.

NACo Policy: NACo supports Internet tax legislation that:

• Establishes a moratorium on new Internet taxes of three years or less;
• Protects existing state and local taxes on Internet access; and
• Establishes a commission to recommend legislation authorizing states and local governments to require collection of sales taxes by all our-of-state vendors.

Action Needed: Oppose Internet tax legislation that has a lengthy moratorium on new Internet taxes of more than three years and limits scope of advisory commission only to transactions on Internet. Contact: Ralph Tabor 202/942-4254 e-mail: rtabor@naco.org

September 1998