Longer Internet tax ban sought

WASHINGTON -- Wary of disturbing an already "fragile" technology sector, senators signaled yesterday they are likely to extend for several years a moratorium on new taxes on sales of products over the Internet.

While opposing new Internet taxes, they also grappled with how states can simplify their tax systems in ways that would allow them to collect existing sales taxes on all retailers, whether at the local mall, through catalogs or in cyberspace.

Congress must "renew its objections to multiple and discriminatory taxes on the Internet," said Sen. John McCain, R-Ariz., at a Senate Commerce committee hearing.

"The plunge in the Nasdaq is a clear sign that we need to be mindful of the economic effects of our tax policy decisions as we move forward on this issue -- and we must move forward."

The ban on new Internet taxes, which Congress passed in 1998, expires in October, leaving legislators scrambling to extend the moratorium and at the same time provide ways for the nation's roughly 7,500 taxing jurisdictions to collect sales taxes for online transactions.

Two Senate bills would extend the ban on new Internet taxes for up to five years, and most senators at the hearing agreed this would happen. This bills also would direct states to streamline sales tax systems so that they can collect the taxes from so-called "remote sellers," businesses that don't have a significant physical presence inside local jurisdictions.

The Supreme Court has ruled that state and local governments cannot require retailers to collect and remit sales taxes unless the businesses have such a physical presence. That could change if Congress acts. When remote sellers do not collect sales taxes, the purchasers are supposed to pay the taxes to the government, but almost nobody does.

In the past, this applied largely to catalog mail-order sales, but the explosion of e-commerce has raised the stakes, with the General Accounting Office estimating state and local governments could lose $12.5 billion in sales taxes from online transactions by 2003.

Mike Gowrylow, a spokesman with the Washington state revenue department, estimates that Washington will miss out on $167 million in state and local sales taxes, of which roughly $53 million is from e-commerce.

By 2003, he said, the amount of lost sales tax revenue from online transactions could rocket to between $76.6 million and $173.4 million.

"Local jurisdictions can impose a variety of taxes on Internet commerce, as long as they do to the offline world what it does to the online world," said Sen. Ron Wyden, D-Ore., co-author of one of the two main bills.

"At a time when the technology sector is very fragile, I would hope that we are very careful."

Wyden's bill authorizes state and local governments to collect sales taxes from remote sellers only after they simplify their sales tax system according to the legislation and get congressional approval.

The other legislation -- introduced by Sen. Byron Dorgan, D-N.D.-- would allow states to collect these sales taxes once 20 have joined together and created a streamlined sales tax system. Both bills would only allow sales taxes to be collected from companies whose gross annual sales top $5 million.

Already, at least 42 states, including Washington, have joined a coalition known as the Streamlined Sales Tax Project, which is working to harmonize the states' sales tax systems, which frequently have different exemptions and definitions for products.

For example, some states might classify candy as food and exempt it from sales taxes.

Robert Comfort, Amazon.com's vice president for tax and tax policy, testified at yesterday's Senate Hearing that states would be "imposing an unreasonable burden on interstate commerce" if they collect sales taxes from remote sellers without whittling down their sales tax codes.

P-I reporter Jennifer A. Dlouhy can be reached at 202-943-9225 or jdlouhy@hearstdc.com