House Panel to Consider Online Sales Tax Bill

A House committee plans to consider legislation in July that would exempt digital music, software and other intangible goods sold over the Internet from sales taxes.

Rep. Billy Tauzin, R-LA, chairman of the House Energy and Commerce Committee, said his committee would take up a bill that would prohibit states and municipalities from taxing digital items downloaded over the Internet, even if Congress allows states to tax other online sales.

The bill is being developed by Rep. Cliff Sterns, R-FL.

Under a 1992 Supreme Court decision, states cannot require out-of-state retailers such as catalog companies to collect sales tax unless they have a physical presence in the state.

Stearns said he was circulating two drafts of his bill and was looking for cooperation from Democrats and members of the Judiciary Committee.

Meanwhile, as Congress considers extending a moratorium on Internet taxes that is set to expire Oct. 21, the battle over how to tax Internet purchases rages on.

In late June, members of the House Judiciary Committee's subcommittee on commercial and administrative law heard testimony from Michigan Gov. John Engler and Virginia Gov. James Gilmore, both Republicans, on extending the moratorium on Internet-related taxation for five years.

While neither governor opposed an extension of the moratorium, their opinions diverged on what should happen after 2006. Engler argued that as e-tailing continues to grow, the Internet should not be a way for buyers and sellers to avoid tax obligations. But Gilmore said the government is not obligated to correct the growing disparity between brick-and-mortar retailers and their e-commerce competitors.

In the Senate, Democrats and Republicans were still negotiating a bill that would consider granting state and local governments more power to tax e-commerce if at least 25 states simplify their sales-tax codes.

The proposal is being drafted by Sens. John McCain, R-AZ; Ron Wyden, D-OR; and John Kerry, D-MA, among others. No deal has been agreed to yet.

Under the proposal, once 25 states vote on and approve the simplification program, Congress would vote on a bill to grant the states new taxing authority, and the measure would not be subject to amendment. Three states already have adopted simplified tax systems, and more than a dozen are considering simplified systems.

Senators have dropped a requirement that states adopt a single statewide sales-tax rate. The hi-tech industry had demanded the single rate, complaining that the 7,600 local tax jurisdictions make collecting sales taxes an unreasonable burden.

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