E-commerce Tax Bill is Bottled up in McCain’s Panel

Congress may extend the moratorium on E-commerce taxes, but a parallel effort to simplify sales taxes nationwide may get left behind.
Joseph RadiganMay 18, 2001

The interminable rivalry between President George Bush and Sen. John McCain seems to be getting played out in an unlikely arena—the debate over the pending extension of the moratorium on E-commerce taxes.

The Senate version of the legislation has been bottled up in McCain’s Commerce Committee, while the sponsors of two rival versions of the bill, Democrats Ron Wyden of Oregon and Byron Dorgan of No. Dakota, both of whom are committee members, hammer out their differences. But aides to the two senators and some tax lobbyists report that although the two sides have settled most of their disagreements regarding Congress’ oversight of the Streamlined Sales Tax Project, they are still far apart on more tangential issues, including the business activity tax.

A McCain aide tells that the Arizona Republican is an active participant in the negotiations between Wyden and Dorgan.

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The Streamlined Project was formed, as the name implies, to come up with uniform standards among the 45 states that have sales and use taxes, and since then, its efforts have generally been regarded on Capitol Hill as being largely linked with the E-commerce Tax moratorium. But a spokeswoman for the body noted Tuesday afternoon that the group itself views its work as independent of the moratorium.

In fact, the spokeswoman said, the Project’s own timetable doesn’t call for a full adoption of its proposals among its membership until 2002 or more likely 2003, well after the October deadline for extending the moratorium.

In the meantime, McCain’s committee has been unable to mark up the bill for three months. The full panel missed one deadline on May 3 to approve the proposal and send it to the full Senate. Now the McCain aide says she doesn’t expect the legislation to get out of committee until June at the earliest. Given Dorgan’s and Wyden’s continuing inability to compromise, it’s not likely to be put before the full Commerce panel when it gathers again on May 24.

But while Dorgan, Wyden, and McCain have dragged their feet, momentum has been building behind a companion piece of legislation sponsored by Rep. Christopher Cox (R. — Calif.), one of the Bush Administration’s key allies in Congress. Cox and Wyden had co-sponsored the original moratorium in 1996, which is due to expire this October. In February, they issued a joint statement about their respective bills to extend the moratorium for another five years.

But their bills were not identical. Cox’s legislation would essentially extend the moratorium as is. Wyden asked that the Streamlined Project complete its work and come back to Congress for approval.

Dorgan has generally been more supportive than Wyden of the Streamlined Project’s work, and shortly after Wyden introduced his bill, drafted his own legislation that would have given a green light to the states to proceed with their efforts and all but guaranteed that Congress would approve their work. But that aspect of the bill raised eyebrows among lobbyists.

Arlene Chapman, vice president for government relations and technical services for the Association for Financial Professionals, says the trade group doesn’t want Congress to be too hasty in its approval of the Streamlined Project’s work. There’s a great deal of concern among the AFP’s membership that the Project could backfire and implement a tax regime that, ironically, is more complicated than the current one.

“Generally what we’ve recommended is that Congress should mandate that there’s a minimally acceptable standard of simplification,” Chapman says.

The whole issue of what exactly qualifies as simplification has become more of a political football at each stage of the process. For example, as reported in February, the Project avoided coming up with a uniform definition for food. A similar problem lingers with clothing, Frank Julian, operating vice president and tax counsel for Federated Department Stores, tells

Some 13 states do not levy a sales tax on clothing, says Julian, who testified in hearings on Internet taxes the McCain Committee held in March. In six of them, a handkerchief is not a clothing item. In six of them, it is. In one of them, it isn’t spelled out.

The failure of the Streamlined Project’s proposals to address some of these inconsistencies is exactly what concerns the AFP, Chapman says.

Earlier this month, the group wrote to Dorgan, Wyden, and Cox, and asked them to “encourage states and local governments to simplify and unify their complex sales tax structures.”

But for all the while that the Senate version of the bill has been stuck in neutral, momentum has been building behind Cox’s simple extension. Last month, both Vice President Dick Cheney and House Speaker Dennis Hastert (R. — Ill.) gave speeches in support of the Cox version. President Bush has also noted that he supports a simple extension of the moratorium.

Whether the combined support of the White House and the House of Representatives is enough to mold the Senate’s version is another matter.

Harley Duncan, executive director for the Federation of Tax Administrators, says his group’s member states are concerned that if the moratorium is extended in its current form, they will miss out on a source of sales tax revenue that could cost them an estimated $20 billion a year by 2003.

The problem the tax administrators have is, that as the deadline gets closer, Congress may opt for the simplest course.

“The closer we get to October, the easier it will be for Congress to just extend the moratorium,” Duncan says.

What makes the Cox bill so unpalatable to state tax authorities is its failure to correct what they say is a serious flaw in the current law, which is based on what amounts to an honor system, Duncan explains. A spokesperson for Rep. Cox did not return calls by press time.

Since online retailers do not need to collect sales taxes themselves, it’s up to consumers to pay sales taxes when they file their state returns every April. But few do, and the failure, while illegal, is virtually impossible to enforce.

Duncan says the original Dorgan bill offered the best prospects for addressing this issue, but given the bill’s current inability to get past the Senate Commerce Committee, it’s far from clear whether it will ever solve the state’s tax dilemma.

For earlier stories on E-commerce taxes.

The E-commerce Tax Issue Heats Up.

It Don’t Come Easy.

Navigating the Rough Waters of State Sales Tax.

New Push to Collect Taxes from E-commerce.

Click here to read the AFP’s letter to Sens. Dorgan and Wyden.

Click here to read the AFP’s letter to Rep. Cox.