Internet taxes are still a bad idea

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With national attention fixed on a distant war and terrorism at home, it’s easy to lose sight of key legislative issues with long-term ramifications.

Internet taxation is a case in point. This month, the House passed a two-year extension of the existing moratorium on Internet taxes—both taxes on Internet service provider access fees and the more complicated issue of so-called "remote" commerce taxes. But the Senate, unable to reach a consensus, allowed the moratorium to end on Oct. 21.

"We’re in limbo," said Lou Mastria, director-public and international affairs for the Direct Marketing Association, which had advocated an extension of five years or more. "We’re concerned because we’re already in a soft economy and [this] introduces uncertainty."

The worry is that 30,000 or so local jurisdictions—some 7,600 of which impose some form of sales tax—will take the end of the moratorium as a chance to try to require out-of-state businesses to collect and remit taxes. (Businesses operating in a state are already obligated to collect and remit sales taxes from buyers in that state.)

The Supreme Court has twice decided, in 1967 and 1992, against requiring businesses without "an actual physical presence" within a jurisdiction to collect and remit taxes to that jurisdiction, noting the burden this would place on interstate commerce.

In testimony before the Senate this summer, Frank Julian, operating VP-tax counsel for Federated Department Stores and chairman of the DMA’s Use Tax Steering Committee, urged legislators not to allow state and local governments to "unleash economic anarchy" by imposing discriminatory taxes. The DMA has also joined those calling for simplified tax rules, including one tax rate per state for all commerce, both remote and over the counter.

Now, thanks to congressional paralysis on the moratorium, state and local governments pinched by the slowing economy will undoubtedly look to Internet sales as a source of tax revenue.

That’s unfortunate. Despite an impressive global growth rate—IDC estimates b-to-b e-commerce will see a year-to-year growth rate of 76% and account for 86% of all worldwide e-commerce in 2005—Internet commerce is still a nascent arena. It’s unwise to use Internet commerce as a wedge to resolve a contentious 30-year-old public policy debate about tax simplification.

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