INSIDE WASHINGTON/Congress set to raise Internet tax issues

The moratorium on Internet taxes is set to expire this month, but Congress has not indicated if it will approve legislation to require retailers to collect a remote sales tax from customers who make purchases online. Collection of a remote sales tax has been one of the top legislative priorities for local leaders who argue that the resulting revenue is needed to help pay for basic services.

The sluggish economy has heightened the need for local governments to recoup the sales tax that was lost when some retailers began conducting business over the Internet. “I think most Congressmen realize that state and local governments are in a bind here,” says Larry Jones, assistant executive director for the U.S. Conference of Mayors.

“States and localities cannot easily collect taxes on out-of-jurisdiction purchases by residents,” says Tom Woodward, assistant director for tax analysis for the non-partisan Congressional Budget Office. “The growth of [Internet] purchases and the difficulty of enforcing compliance has combined to erode [local governments’] sales tax bases. The current estimates suggest that such erosion could be large enough to compel many states to choose between reducing spending or seeking new revenues through higher tax rates or new taxes.”

A study conducted by the University of Tennessee, Knoxville, concluded that failure to approve Internet tax legislation could cost local governments upwards of $20 billion a year. The current moratorium expires on Oct. 21, and some people, particularly online retailers, are lobbying for a five-year extension.

Ever since Congress passed the Internet Tax Freedom Act in 1998, city and county officials have aggressively lobbied Washington in an effort to require Internet retailers to pay sales taxes. With the deadline looming, lobbying efforts by local officials have increased. Organizations such as the National Association of Counties are sending out “Action Alert” messages to their members urging them to contact their Congressional representatives about supporting the local government position on the subject.

The moratorium’s advocates fear that failure to extend it would open the door to state and local governments that want to institute Internet access fees and other discriminatory taxes. “Failure to extend this protection will give states and localities free rein to impose a host of crippling and potentially fatal taxes on Internet commerce,” predicts Georgia Republican Congressman Bob Barr.

Lobbyists that represent local government organizations disagree. “There is no real threat that any states are going to start imposing taxes on the Internet,” says Ralph Tabor, NACo’s tax lobbyist. “Politically, it would be very difficult for any governor or state legislature to enact an Internet [access] tax.”

Local governments are indicating a willingness to compromise on the moratorium. Tabor says if a resolution is not reached by the October deadline, NACo likely would support a short-term extension of the moratorium — six months or so — to allow more time for differences to be ironed out.

Online retailers argue that the two issues — a moratorium on collection of access fees/discriminatory taxes and efforts to pass legislation requiring collection of remote sales taxes — should not be linked. They note that, before addressing the remote sales tax issue, Congress must simplify sales tax collection for retailers who have to contend with more than 7,500 taxing jurisdictions.

However, Jones says the USCM would be “strongly and vehemently” opposed if those simplification efforts involve a single tax rate proposal. “We don’t want the federal government to come in and dictate tax rates and other things,” he says. “It’s a slap in the face of democracy.”

The author is Washington correspondent for American City & County.