Legislators debate proposals for e-commerce taxes

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July 12, 2000
Web posted at: 8:51 a.m. EDT (1251 GMT)

by Margret Johnston

(IDG) -- Congress is weighing legislation aimed at helping state and local governments resolve a tax-collection problem that has plagued them for decades, but has failed to spark lawmakers' interest until the explosion of electronic commerce.

Several current bills would clear the way for states to collect sales and use taxes on catalog and Internet transactions that occur between a buyer in one state and a merchant in another when the merchant has no "physical presence," such as an outlet or warehouse, in the buyer's state. Most shoppers who buy from out-of-state merchants are exempt from paying sales tax to the seller's state, but are supposed to pay use tax to their own state and local governments.

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Members of the House Judiciary Subcommittee on Commercial and Administrative Law recently held a hearing on three of the bills, aimed at fixing the problem on behalf of state and local governments--which depend on sales taxes to support police, fire, and other crucial services--and calming fears about the negative effect of e-commerce on their tax bases.

One of the bills, sponsored by Rep. Spencer Bachus (R-Ala.), would set up a sales tax compact involving at least 20 states. The states in the compact would agree to simplify and harmonize their tax codes in exchange for the right to collect the use tax on purchases by residents of their states from outside retailers.

In the past, the Supreme Court has ruled that the thousands of local tax jurisdictions across all the states would impose too great a burden on out of-state retailers who would have to comply with their varied codes. But in its most recent ruling, the court said that if Congress found a way to simplify the tax system, merchants could be compelled to collect the tax.

Congress has wrestled with the issue before, but as e-commerce grows, state and local officials are putting enormous pressure on lawmakers to act, said Karl Frieden, a partner at Arthur Andersen, in Chicago, and author of "Cyber Taxation: The Taxation of E-Commerce."

The Bachus bill appeals to states because, although it would not require a single tax rate in jurisdictions within a state, it would authorize states themselves to set a single rate, Frieden said. The compact would be designed to provide a framework for a more unified and simple sales and use tax system without intruding on states' rights to set and regulate the sales tax locally.

But Bachus' bill and the others face strong opposition from members of Congress who oppose any tax law changes that might jeopardize the growth of e-commerce, said Frieden, who believes that none of the bills debated at the hearing are likely to pass this year.

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Rep. Spencer Bachus

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