Congress Opens Door to Internet Taxes

WASHINGTON, D.C. -- Despite the U.S. House of Representatives' Tuesday approval of an extension on the current Internet tax moratorium, the Senate has failed to do the same. The ban expires this Sunday--opening the door for states to revise their policies and tax online sales.

It's too late to prevent the ban from expiring, since both the House and Senate are closed until Tuesday for anthrax testing, following the contamination of 31 congressional workers who were exposed to the bacteria by a laced letter.

Now, with the ban ending, the only barrier to states taxing online purchases the same way that they tax goods bought in stores is a 1992 Supreme Court decision. It forbid states from collecting taxes from Internet operations unless the company has a significant presence in that state.

That's a barrier that the states are working to remove on their own, says Frank Shafroth, director of state and federal relations with the National Governors Association in Washington, D.C.

Half of the 45 U.S. states that charge state taxes will gather at the end of November to rewrite the rules and "update their systems for the twenty-first century," Shafroth says. He expects others to follow.

"If this new system is up, you get a level playing field," Shafroth says. This means that state taxes for the Internet will be the same as for retail stores, he says. "Then we can go back to the Supreme Court and say 'We've removed the burden.' "

Delay Request Fails

Senator Byron Dorgan, a Democrat from North Dakota, on Thursday failed to convince the Senate to expand the Internet tax moratorium until June 30, 2002. His proposal included forcing state and local governments to revamp their tax structures, which vary by jurisdiction and can create tax collection nightmares for e-commerce companies that sell goods to consumers in many areas. He urged states to implement a simpler consumption tax on remote sales.

The bill passed in the House had a similar goal--to hold off on taxing Internet goods while states figured out a structure that treats sales made online fairly.

The Internet Tax Moratorium Act was established in 1998 to prohibit states from taxing the fees that ISPs collect for providing Internet service and from collecting Internet-specific taxes on e-commerce transactions.