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House Energy and Commerce Committee to Consider New Internet Tax Measure

House Energy and Commerce Committee Chairman Billy Tauzin (R-Louisiana) recently announced the committee’s intention to consider a new Internet tax measure in July. The new bill, being drafted by Representative Cliff Stearns (R-Florida), would exempt digital items (i.e. music, software and other intangible goods) sold over the Internet from sales taxes — even if Congress allows states to collect taxes from other online sales.

Time is running out on the Internet tax moratorium, set to expire in October. Stearns’ measure appears to be the latest attempt to find some common ground on this issue. In addition to prohibiting states and municipalities from taxing digital items on the Net, the bill will probably contain provisions that require states to adopt a single, uniform tax rate — similar to a bill in the Senate sponsored by Senator Ron Wyden (D-Oregon).

The debate on Internet taxation is being clouded by a coalition of states that are in the process of simplifying their tax codes with the hopes of getting Congressional approval to collect sales taxes from remote merchants. Under a 1992 Supreme Court ruling, states, without permission from Congress, cannot require out-of-state retailers to collect and remit sales taxes unless the retailer has a physical presence or "nexus" in the state. The coalition of states, together with traditional brick-and-mortar retailers, are lobbying Congress to convince them to buy into the simplification project and grant permission to reach across their borders to collect the taxes.

Unfortunately, any extension of the moratorium, which has widespread support in Congress, is being held hostage by the simplification issue. Several members, particularly in the Senate, have indicated that they wouldn’t support an extension unless the simplification issue is included.

Representative Stearns’ measure could be a sign that the debate is shifting between extending the moratorium and giving states permission to tax remote vendors to defining specific classes of activity on the Net that would not be subject to taxation. This would be a dangerous path to follow, as classifying different products and transactions would significantly skew the playing field. In addition, such a system is regressive in nature.

The Internet tax moratorium expires in October, and it doesn’t appear any agreement is close to being reached on the simplification issue. Representative Stearns’ measure will only serve to cloud the issue further. Congress needs to pass a clean extension of the moratorium before it is too late. The consequences of letting the moratorium expire will have a chilling effect on the new Internet economy.

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