Net-tax debate begins to heat up

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By Jennifer Jones

(IDG) -- As the clock runs down on the current ban on new Internet taxes, lawmakers have once again become embroiled in a sideline issue: what to do about taxes already owed on e-commerce purchases that go uncollected by states.

And that's not the only issue. In the past few months, at least five separate legislative initiatives related to Internet taxation have been put forth. Whereas some initiatives focus on renewing the politically popular Internet tax moratorium, others address more peripheral issues such as how to tax digital goods and how exactly to determine what constitutes a corporate presence in a jurisdiction.

The moratorium that keeps state and local governments from glomming new taxes onto interstate online purchases or onto Internet access services expires in October. Congress is expected to renew, and perhaps even make permanent, the freeze on new taxation. Most agree, however, that cross-state tax issues will likely be left on the table after the moratorium is renewed.

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"Given this short window, there is just not enough time for simplification of the state sales tax system, which is a complicated process," said Bartlett Cleland, vice president and counsel at Information Technology Association of America (ITAA) in Arlington, Va.

Indeed, states themselves have wrestled internally for months over the simplification issue. In February, state government groups announced they would scale back their efforts to streamline and standardize the sales-tax collection of the multitude of states with such a tax.

"A number of states are committed to simplification. But it is complex, and we weren't able to get as far as we'd [have] liked to the first year," said Graham Williams, a member of the commerce and communications committee at the National Conference of State Legislatures (NCSL) in Washington.

NCSL and a university research group have estimated that by 2003 states might lose more than $23 billion in uncollected e-commerce sales tax.

State and local government groups therefore stand behind legislation put forth by Sen. Byron Dorgan (D-N.D.) "The bill tracks along concepts laid out in our [Streamlined Sales Tax Project] and covers basic areas where simplification needs to occur," NCSL's Williams said.

But NCSL and others are less pleased with a marquee piece of Net tax legislation, the first bill of its kind introduced this congressional session.

Offered in February by Senators Ron Wyden (D-Ore.) and Patrick Leahy (D-Vt.), the Internet Nondiscrimination Act contains a controversial one-tax-rate per state provision. NCSL argues that such a measure would especially hurt states with large cities such as New York.

Even e-commerce giants such as Amazon.com are not demanding one-rate per state. At a recent hearing on Capitol Hill, Robert Comfort, Amazon.com's vice president for Tax and Tax Policy, said, "Although a single, nationwide rate applicable to all remote sales would be the simplest approach, Amazon.com does not believe it would be necessary." Amazon, he continued, could work with one rate per ZIP code.

Also less than popular with state and local government groups is a bill designed to set clear criteria for what constitutes a corporate presence, or "nexus," thereby making a business a taxable entity in a jurisdiction.

Among other things, The New Economy Tax Fairness Act introduced by Senators Judd Gregg (D-N.H.) and Herbert Kohl (D-Wis.) would keep state and local governments from taxing businesses simply because a company relies on an ISP or hosting service in a certain jurisdiction. NCSL and others, however, claim the Gregg-Kohl bill is skewed too far in favor of high-tech companies.

Additionally, a House bill that would exempt digital goods such as software and downloadable entertainment files hit the scene recently. Seeking to add "jurisdictional certainty" to the purchase of digital goods, Rep. Cliff Stearns (R-Fla.) said, "Having 50-plus separate and, at times, incongruent regulations governing interstate commercial transactions poses a substantial burden."

Most observers, however, said that only the most bare-bones effort to extend the moratorium on Net taxation is likely to move anytime soon.