House Limits Internet Tax Moratorium to Two Years; Senate Allows it to Expire

With the Senate failing to act on extending the Internet tax moratorium and lawmakers not returning to session before its October 21 expiration, the moratorium on new and discriminatory Internet taxes and the ban on Internet access taxes will lapse, opening the door to "economic mischief" by local and state taxing authorities and implanting further uncertainty in the already crippled technology market.

Senate failure to pass an extension to the moratorium is the direct result of obstruction by some members, led by Senator Byron Dorgan (D-North Dakota), who refused to deal with the issue without provisions allowing states to shift their tax collection duties onto out-of state businesses. The House of Representatives overwhelmingly approved a clean extension of the moratorium, H.R. 1552, on October 16, but for only two years.

The limited two-year extension passed in the House is a watered down version of H.R. 1552, sponsored by Representative Christopher Cox (R-California), which initially called for a five-year extension of the ban on multiple and discriminatory taxes that do not apply to offline purchases, and sought to make permanent the moratorium on Internet access taxes — provisions in line with recommendations by the Advisory Commission on Electronic Commerce authorized by the Internet Tax Freedom Act (ITFA) of 1998. An amendment by Representative Spencer Bachus (R-Alabama) in the House Judiciary Committee to limit the extension to two years set the stage for the House vote.

While the two-year extension would have been better than allowing ITFA to expire, the limited time frame was cynically orchestrated by tax-hungry state governors and their friends on Capitol Hill to keep the moratorium tied to the entirely separate and controversial issue of allowing the states to force their sales and use tax collection responsibilities onto out-of-state businesses; something currently prohibited by the Supreme Court’s decision in Quill Corp. v. North Dakota.

Thirty-two states are currently engaged in a program, headed-up by the National Governors Association, known as the Streamlined Sales Tax Project (SSTP). In an effort to urge Congress to overturn the high court’s precedent established in the Quill decision, the states claim that the SSTP would "simplify and streamline" the multiple taxing jurisdictions of the participating states and their localities to a point that would mitigate the current barriers on interstate commerce should they be allowed to shift their tax collection burdens to out-of-state businesses.

But the original intent of the Constitution’s Commerce Clause, outlined in Article I, Section 8, was not only to protect against interstate trade barriers, but also to promote healthy competition between the states in terms of taxation and regulations, or rather, the lack thereof. Congressional approval of the SSTP would permit the states to enter into a multi-state sales tax compact, significantly expanding states’ taxing jurisdictions and permitting collusion between participating states, which would result in the elimination of such competition.

From a public policy standpoint, it is important to note that commerce on the Internet is still in its infancy. Congressional authorization of a multi-state tax regime would stifle the prospects for future growth in e-commerce, by implanting interstate trade barriers that the founding fathers sought to prevent. Furthermore, claims of eroded states’ sales tax bases due to e-commerce are unfounded, and online retail sales have failed to even come close to the inflated projections of the National Governors Association (NGA). Currently, nearly all business-to-business transactions online that are subject to taxation are collected by the states of jurisdiction.

Online transactions between individual consumers and online businesses, which make up less than one percent of all retail sales in this country and are currently declining, are already subject to taxation in the form of "use" taxes. The burden falls on the individual states to collect such taxes from their citizens. Due to the politically unpopular nature of use taxes, states choose not to enforce their collection. The loss in tax revenue projected by the NGA is currently measured by the revenue that state use taxes would generate, if the states bothered to collect them in the first place.

The instant and spontaneous nature of Internet commerce between individual consumers and online retailers makes it nearly impossible to measure whether such transactions would ever take place if the Internet didn’t exist. Given the miniscule percentage of all retail sales that actually do occur online, a substantive argument can be made that they wouldn’t.

Finally, the NGA fails to weigh the benefits from e-commerce, in the form of new jobs and increased tax revenue from property and income taxes, to what they claim to be revenue "losses." It’s quite possible, if not probable, that many state tax revenues have increased as a result of e-commerce.

What does all of this have to do with extending the Internet tax moratorium? Absolutely nothing! The states are holding an adequate extension of the moratorium hostage and using it as political leverage on Congress to authorize their multi-state sales tax compact. Passage of a limited two-year extension, as opposed to extending the moratorium for five years or making it permanent, forces Congress to revisit the sales tax issue when the moratorium expires again in 2003. This makes absolutely zero sense.

Even if one accepts states’ claims that the SSTP would eliminate the interstate trade barriers that currently exist, the SSTP proposal itself states that its full implementation will not take effect until December 31, 2005. Based on this language, even with Congressional authority, states could not force remote businesses to collect and remit their sales and use taxes for at least five years — the length of time outlined in Representative Cox’s original version of H.R. 1552, and a Senate bill, S. 1525, sponsored by Virginia Republican George Allen.

The Senate could still act quickly to renew the moratorium without provisions allowing for the creation of a multi-state sales tax regime. While a five-year or permanent extension would be ideal and make the most sense, at this point, the least the Senate could do is follow the House’s lead and pass a straight two-year extension. As one editorial page put it, "By then more governors may figure out that the Internet is more than just a vast new honey pot for them to tax." That’s doubtful. What is not at all in doubt is that when the Internet is taxed, and taxed again, the Center for Individual Freedom will tell you who to thank

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