Legislators Debate Proposals for E-Commerce Taxes

SAN MATEO (07/07/2000) - Congress is considering legislation aimed at helping state and local governments resolve a tax-collection problem that has existed for decades, but only recently gained more interest from lawmakers because of the growth of electronic commerce.

There are a number of bills that 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 that has no "physical presence," such as an outlet or warehouse in the state where the buyer resides. Currently, shoppers who buy from out-of-state merchants typically are exempt from paying the sales tax to the state the merchant is in, but the consumers are supposed to pay use tax to their state and local governments.

Members of the House Judiciary Subcommittee on Commercial and Administrative Law held a hearing recently to discuss three of the bills aimed at fixing the problem on behalf of state and local governments and calming fears about the negative effect of e-commerce on their tax base.

Untaxed Internet and catalog sales are a serious issue because police, fire, and other critical local services are largely supported by sales taxes, state and local officials said.

Much of the discussion at the hearing focused on a bill sponsored by Rep.

Spencer Bachus, a Republican from Alabama, that 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 gaining the right to collect the use tax on purchases made by residents of their states from retailers physically located outside their state.

The states have been in a bind over the collection of the tax for decades because of Supreme Court rulings that say it is too great a burden for out-of-state retailers to collect the tax. That is, considering the thousands of tax jurisdictions, it would be too complex for the retailers to have to comply with so many tax codes, the court has ruled.

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 LLP, 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 across a state, it would authorize states 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 changes to the tax laws that could jeopardize the growth of e-commerce, Frieden said.

Both Frieden and Tom Santaniello, a spokesman for the Computing Technology Industry Association (CompTIA), in Arlington, Virginia, said none of the bills discussed at the hearing are likely to pass this year.

Santaniello said CompTIA opposes the Bachus bill because allowing states to collect tax from merchants located outside their borders violates a principle of interstate commerce. A better method, he said, would be to place the burden of collecting the tax on the local authority, which could carry out the procedure using software designed to calculate the tax, discover who owes it, and where to send the bill.

Margret Johnston is a Washington correspondent for the IDG News Service, an InfoWorld affiliate.

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