Governors lobby Congress on online sales taxes

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By Heather Harreld

(IDG) -- The nation's governors are urging Congress to level the playing field for Main Street businesses by extending the moratorium on Internet access taxes, according to a letter to Congress made public Monday.

In the letter, which was signed by 44 governors, Congress is urged to extend the moratorium on taxing Internet access only with authorization for the states to streamline and simplify the existing sales tax system.

The current moratorium on Internet access taxes, like those consumers pay to Internet service providers, is scheduled to expire in October. The moratorium does not apply to sales taxes.

Utah Gov. Mike Leavitt said governors are not talking about adding a new tax to the Internet. Instead, the issue is whether it would be best to create a permanent special privilege for consumers and businesses that buy and sell goods over the Internet, or if legislators should create a level playing field that treats all buyers and sellers the same.

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Currently, sales and use taxes are owed on all online transactions, but states are prohibited from requiring "remote sellers" to collect and remit those levies.

"The impact is on mainstream retailers," Leavitt said Monday. "This is an issue of basic fairness. Why should one group of consumers ... be treated differently than others? It's both illogical and difficult for remote sellers to deal with the existing system."

A 1992 U.S. Supreme Court decision said states can only require sellers that have a physical presence or "nexus" in the same state as the consumer to collect so-called use taxes. In instances when a seller does not have nexus, consumers are required to calculate and remit the taxes owed to their home states at the end of the year.

The problem, according to the National Governors Association (NGA), is that most people are unaware that they're supposed to pay, and states lack an effective enforcement mechanism. Online and catalog sellers, thereby, have a significant price advantage over main street businesses that must collect a sales tax on all transactions, Leavitt said.

The NGA has been spearheading an effort called the Streamlined Sales Tax Project to simplify and streamline the system. Eighteen states have passed model legislation developed by the project that would enable them to simplify their sales tax codes, and 11 states have introduced such bills.

Governors have urged Congress to enact legislation giving states the authority to implement the streamlined and simplified system, which would enable remote sellers to collect and remit sales and use taxes with little or no burden.