Can Senate Democrats Relieve E-Commerce Tax Deadlock?

With the deadline only four months away, Congress is still wrestling with extending the E-commerce tax moratorium.
Joseph RadiganJune 26, 2001

In the topsy-turvy world of E-commerce taxation, nothing is ever as it seems, and with the change of control in the U.S. Senate from Republican to Democrat, an extension of the current moratorium seems little closer to realization than it was at the beginning of the year.

Back in January, it appeared that the moratorium was all but certain to get a new lease on life. The most significant unresolved issue was whether a “clean” bill passed with no significant loopholes or amendments, or if Congress would pass a bill that linked the issue of E- commerce taxation to a parallel effort to align and simplify sales taxes in the 45 states that levy them.

But with the current moratorium scheduled on Oct. 21, which is less than four months away, concerns are mounting that Congress isn’t moving quickly enough.

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“Everybody who’s following the issue is looking at the calendar,” says Bob Comfort,’s vice president of tax policy. “On the other hand, it’s not a total surprise that they may be going down to the wire.” In 1996, when the current law was enacted, Congress didn’t pass the bill until just before it recessed for the fall campaign.

Currently, in the House of Representatives, Rep. Christopher Cox (R- Calif.) is sponsoring a bill that essentially extends the current bill for another five years. In the Senate, rival pieces of legislation backed by Ron Wyden (D-Oreg.) and Byron Dorgan (D-N.Dak.) are deadlocked in the Commerce Committee now chaired by Fritz Hollings (D-S.C.).

Rep. Bob Barr (R-Ga.), chair of the House Judiciary Subcommittee on Commercial and Administrative Law, is scheduled to hold hearings on the Cox bill on June 26. The witness schedule includes Cox and Comfort, along with Gov. James Gilmore of Virginia and Gov. John Engler of Michigan, two Republicans who are on different sides of the issue.

Gov. Gilmore is friendly toward the dot-com sector’s proposal to simply extend the moratorium. Gov. Engler is the incoming president of the National Governors Association, which has been lobbying Congress to link the moratorium extension to the sales-tax-simplification effort.

Gov. Gilmore had chaired the Advisory Committee on Electronic Commerce, which Congress had empanelled to study the issue of Internet taxes. But the committee concluded its work last year without reaching a consensus.

Graham Williams, a political aide with the National Conference of State Legislatures, says the presence of Engler, a conservative Republican and close ally of the Bush Administration, is meant to demonstrate to the Judiciary Subcommittee that the E-commerce issue cuts across most traditional political boundaries.

The other witnesses on the schedule include Rep. Ernest Istook (R — Okla.), who is sponsoring a House bill that is a companion to Dorgan’s Senate legislation, and Grover Norquist, chairman of Americans For Tax Reform, and a consistent opponent of any effort to raise existing taxes or impose new ones.

The current law doesn’t so much prohibit all E-commerce taxes, merely those that are “discriminatory,” or apply solely to the Internet and no other form of business. But it has resulted in a system that proponents of the sales-tax simplification effort allege is unworkable.

E-tailers are obligated to collect Internet taxes only in states where they have “nexus,” the legal term for a physical presence such as a store or warehouse. In other states, while E-tailers don’t have to collect the taxes, consumers are obligated to pay them each spring when they file their returns. Few consumers actually comply with that requirement, and most observers view it as unenforceable.

As the volume of E-commerce transactions has risen, the amount of tax revenue lost to the states each year under the honor system has climbed. One study from the University of Tennessee says the states will lose a combined $10 billion in sales taxes by 2003.

The lost tax revenue is even more acute in states like Texas and Florida, which, Williams says, get more than half their tax receipts from sales taxes.

Before the Senate changed hands, the Commerce Committee was chaired by John McCain (R-AZ), who was trying to craft a compromise, but with little success. Hollings, the new chair, has joined the negotiations that now include Massachusetts Democrat John Kerry in addition to Wyden, Dorgan, and McCain.

The Commerce Committee is only now adjusting to the new power arrangement in the Senate, a Hollings aide tells On June 19 it held its first hearings since Hollings took the chairman’s gavel from McCain. Those hearings looked into the aftermath of The 1996 Telecommunications Reform Act, which is also a hot-button issue for the committee and a sign of how full its calendar is aside from E-commerce taxes.

The earliest the full committee will address the issue is sometime in July, although no schedule has been set.

In mid-June, USA Today reported that the Senators had finally agreed on a bill, although Frank Julian, operating vice president and tax counsel for Federated Stores Inc., and Amazon’s Comfort say they are concerned about news reports that the compromise legislation will not be precise enough in spelling out the goals Congress expects from the Streamlined Sales Tax Project (SSTP).

But NCSL’s Williams says it’s highly unlikely that the Commerce Committee, let alone the full Senate, will pass a bill that gives a blank check to the states involved in the SSTP.

Dorgan has been the Senate’s chief proponent of linking a moratorium extension to the two-year-old SSTP. But many moratorium proponents oppose such linkage unless it clearly moves the 45 states with sales and use taxes in the direction toward a more uniform system. As it is, states and local governments not only differ on tax rates, but also on how they define taxable and non-taxable items such as clothing and groceries.

A Dorgan aide notes that the Senators are well aware of the time constraints but have had great difficulty in forming a consensus. As soon as agreement is reached on one issue, another sticking point sets back the whole effort.

“The negotiations have been proceeding on the premise that, if anything is on the table, then everything is on the table,” the Dorgan aide notes. “Nothing has been decided until everything has been decided.”

The aide also argues that proponents of a simple moratorium extension are being disingenuous. The entire E-commerce landscape has changed dramatically in the five years since the original moratorium was passed. What was a relatively small sum in 1996 has ballooned into a considerable amount of tax revenue today.

What’s more, a poorly written moratorium extension could be riddled with loopholes that essentially allow consumers and businesses to avoid billions of dollars in taxes simply by ordering products on the Internet and then driving down the block to pick up their goods.

The aide says no Senator wants to be held responsible for failing to extend the moratorium. “We don’t want to get to a point where we have a moratorium, then we don’t, and then we might again,” he says. But, he adds, the possibility of Congress simply allowing the moratorium to expire has already come up in the negotiations among the Senators.

Still, Federated’s Julian says that if the Senate insists on linking an extension with the tax-simplification effort, then the likelihood of passing a new bill would become more remote.

“That’s very time consuming,” he says. “There’s much less of a consensus, and a lot more work needs to be done.”

What’s worse than the time restrictions is that Julian, like other corporate tax officials, fears that a poorly designed tax simplification effort will do little but extend their agony under the current tax regime.

“It’s critical that Congress set a high standard for simplification,” Julian says.

“We could support simplification, provided that Congress sets out very specific guidelines for the states to follow, and that there’s a very thorough review of the states’ compact,” says Amazon’s Comfort.

But NCSL’s Williams says fears that the SSTP will be given too much leeway are unfounded. He expects the Senate to reserve the right to reject any effort among the states in the SSTP that is politically unpopular. More important, by this fall, the SSTP will probably close its doors and be replaced by a new group of states that have already enacted simplification legislation.

The new body will differ from the SSTP in two important respects. Given that states will have already have had to have passed a tax bill in order to join, there may be a higher level of commitment among its membership. In addition, the states will be represented by as many as four officials: two selected by each state’s legislature and two selected by its governor.

The SSTP consists of only one representative from each state, usually a tax official. Williams says the inclusion of representatives who are named directly by elected officials may create an organization that is more attuned to retailers and other business groups with a vested interest in the tax simplification effort.

“The onus is really on the states to come up with a truly simplified system,” Williams says. “If they don’t, in two or three years, the states will be losing big dollars and will be looking for other sources of revenue.”

Read’s previous stories on Internet Taxation

Tax-Free But Not Trouble-Free (Jun. 20, 2001)

Senate Bill Could Give U.S. Governments More Power to Tax Internet, Phone Sales (Jun. 18, 2001)

There Is No Net Tax Deal – Senate Officials (Jun. 15, 2001)

E-Commerce Bill is Bottled Up in McCain’s Panel (May 18, 2001).

Two Dems Issue E- Commerce Warning (Mar. 16, 2001)

Navigating the Rough Waters of State Sales Tax (Feb. 27, 2001)

The E-Commerce Tax Issue Heats Up (Feb. 6, 2001).

New Push to Collect Taxes from E-Commerce (Feb. 1, 2001)

It Don’t Come Easy (Dec. 1, 2000)

Consumers Would Shop Less if Internet is Taxed (Oct. 19, 2000)

You can also read this story from CFO magazine

The 2000 Tax Survey: States of Confusion (Sept., 2000)

and these stories from ecfonet

Nexus Perplexus (June 2001)

Wag the Dog (Sept., 2000)

You can also read this study conducted by eCFO magazine and KPMG

The e-Transformation of Corporate America

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