Governors Ask for Chance to Develop Internet Sales Tax System

More than 40 governors signed a letter this week asking Congress not to extend the moratorium on Internet taxation unless states are allowed to devise a system that would let them collect sales taxes on online purchases.

The letter by the National Governors Association, sent to all House and Senate members, urges Congress not to extend a 1998 moratorium on new and discriminatory Internet taxes unless states are granted that power. The moratorium expires Oct. 21. E-tailers currently must collect sales taxes only from residents of states where they have a physical presence, or nexus.

The letter states, “If you care about a level playing field for Main Street retail businesses and local control of states' governments and schools, extend the moratorium on taxing Internet access only with authorization for the states to streamline and simplify the existing sales tax system.”

The Direct Marketing Association, meanwhile, said the governors are ill-advised.

“The states do not need an act of Congress to develop a simplified sales tax system,” said Frank Julian, operating vice president and tax counsel for Federated Department Stores and chairman of the DMA's Use Tax Committee. “We support the extension of the moratorium while Congress continues to work out a practical way to substantially simplify the more than 7,600 varying sales tax codes.”

The governors' letter follows approval by a House Judiciary subcommittee of a bill that would extend the moratorium on sales taxes for online purchases through October 2006 and permanently ban Internet access taxes. The bill, the Internet Non-Discrimination Act and sponsored by Rep. Christopher Cox, R-CA, is expected to reach the full Judiciary Committee and House floor in the next few weeks, once legislators return from recess. Insiders said the Judiciary Committee is set to approve the measure or a similar one next month.

Congress is considering several proposals involving Internet tax and interstate taxation. Reps. Bob Goodlatte, R-VA, and Rick Boucher, D-VA, introduced a bill that would make permanent the ban on Internet access taxes and sales taxes. Unlike Cox's bill, this one seeks to simplify the current nexus standard.

A Senate bill introduced in February by Sen. Ron Wyden, D-OR, would extend the sales tax moratorium through Dec. 31, 2006 and encourage states to move toward a uniform tax code for Internet usage. Before Congress began its recess this month, there were negotiations in the Senate about tackling the sales tax issue as a part of extending the moratorium.

Opponents of Wyden's bill argue that simplifying sales taxes nationwide could take years but that extending the moratorium on other Internet taxes is crucial to Internet commerce. Supporters, including most online retailers, want sales tax collection streamlined so there is one tax rate per state, regardless of whether the transaction is online, via a catalog or in a store.

Sens. Judd Gregg, R-NH, and Herb Kohl, D-WI, introduced the New Economy Tax Fairness Act, which would clarify the rules governing when states may impose taxes or collection requirements on interstate marketers. A similar bill was introduced in the House.

Also this week, the DMA began a grass-roots e-mail campaign urging members to encourage legislators to co-sponsor the Gregg-Kohl bill and its House counterpart.

“Both bills would help eliminate the aggressive tactics of some state tax collectors, who are continually trying to subject out-of-state companies to a myriad of state taxes,” the DMA said.

These bills would clarify what activities constitute sufficient nexus to enable states to collect sales taxes, the DMA said. Resolving this issue is critical to ensure the continued growth of the direct marketing industry.

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