The E-commerce Tax Issue Heats Up

Will Congress extend the moratorium on E-commerce taxes?
Joseph RadiganFebruary 6, 2001

The push for a nationwide policy on E-commerce taxation has been proceeding in fits and starts for years, and it’s still not clear where it will wind up.

But Tuesday morning, the drive to simplify state sales and use taxes as they apply to E- commerce will take a big step forward when Sen. Ron Wyden, (D — OR), and Rep. Christopher Cox, (R — CA), introduce a bill to extend for five years the Tax Freedom Act of 1998 — which is due to expire this October.

The 1998 law included a moratorium on so- called discriminatory taxes and prohibited taxes on Internet services that cannot be assessed on comparable goods and services from traditional retailers or mail order merchants.

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Perhaps the most widely applied example of the moratorium is the freedom Internet service providers enjoy from paying state and Federal Communications Commission fees levied on local and long-distance phone companies. Tax freedom for ISPs doesn’t apply in 11 states that were grandfathered under the 1998 law because those states had been charging the taxes all along.

The Cox/Wyden bill proposes to essentially continue the existing law as is, although it recommends eliminating the grandfather exemption for the 11 states. That proposal may add to the difficulty of getting the moratorium extended before the October deadline expires. A lobbyist at the National Conference of State Legislatures, or NCSL, says some of the 11 states, including Texas and Tennessee, which have no personal income taxes, are reluctant to surrender any tax revenue they now receive.

But the 11 states may find themselves in the minority, particularly as tax-cut fever gathers steam as a way to revive the economy. Marty MClintock, Deloitte & Touche’s global managing partner for E-business tax services, says, “If anything, the sensitivity about the ‘R’ word, recession, might drive this forward.”

What’s more, the Cox/Wyden bill is only one of several legislative initiatives at both the national and state level under consideration. How they play out will very much determine whether corporate tax officials are left with the current hodgepodge of sales tax rules that vary from state to state, and in many instances, even at the county and local government level.

“We are very interested in the state legislation,” says a tax officer at a national food retailer, who asked for anonymity. “It would be very beneficial for us to have some consistent rules on the taxation of food.”

Already, in the first month of the new year, nine states have begun work on legislation modeled on a Dec. 22 proposal from the Streamlined Sales Tax Project, a body formed a year ago to come up with uniform standards on E-commerce sales taxes.

Yet just last week, the NCSL recommended that the Streamlined Project’s proposal avoid addressing some topics, such as food, that risk making it more difficult for individual states to enact E-commerce tax bills into law. Soft drinks and candy are among the items taxed in some states, but not in others. The NCSL decided that devising uniform definitions for taxable and non-taxable foods was too much to address this year.

But the food retailer’s tax officer would have a problem if the food tax issue is avoided.

“You could end up getting the worst of both worlds if they avoid food,” says the executive. “You end up getting the extra reporting requirements from the Streamlined Project, but no break on treating food.”

The Streamlined Project’s handling of the food issue to date is indicative of the difficulty the states have had reaching a broad consensus.

“Our members wanted to make sure we didn’t make the legislation too complicated,” says Neal Osten, the NCSL’s director of commerce and communications. “Our concern was that it would be difficult for a large number of states to move forward in one year.”

But this year, Congress appears determined to extend its moratorium on E-commerce taxes, while the Streamlined Project is still working to build some momentum.

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