Senate Panel Calls for 2-Year E-Tax Moratorium

The Senate Finance Committee passed a bill last week seeking a two-year moratorium on new state and local taxes on Internet access and also has ramifications on interstate sales tax collection.

The tax ban was shortened by a year from the committee's original proposal. Also, the bill would create a commission to report back to Congress on Net tax issues, including whether merchants should collect sales taxes in states where they don't have a physical presence. The bill passed by a 19-to-1 vote.

The upside, according to the Direct Marketing Association, is that the committee changed its bill so that any recommendations the commission would make first would have to pass by a two-thirds super majority rather than a simple majority. The 16-member commission would include four federal officials, six state and local officials and six business and consumer-group representatives. To get a super majority, 11 would have to agree.

“It means it will be tougher to get the commission to recommend to Congress that we should collect [sales] taxes where we don't have a presence,” said Mark Micali, vice president of government affairs at the DMA. “Even if the four federal officials and six state and local officials get together and say we have to collect sales taxes across state lines, they still won't have a super majority.”

Micali called the committee's bill acceptable but “far from ideal.”

As the various Internet tax bills travel through Congress, the DMA said it supports one by Sens. Judd Gregg (R-NH) and Joe Lieberman (R-CT) that would place a three-year moratorium on new state and local Internet access taxes and would create a commission, but only to explore harmonizing how state laws treat Internet taxation, not interstate sales tax collection.

Micali said the DMA thinks the Gregg-Lieberman bill may be merged with the Senate Finance Committee's bill and another bill the Senate Commerce Committee passed that would impose a six-year moratorium on new state and local taxes on Internet access.

“No one knows how they would be grafted together, but a possibility is a three-year moratorium on Internet taxes and a commission that we hope would only look at harmonizing state laws treating the Internet rather than looking at the interstate sales tax issue,” Micali said.

Nothing on Internet taxation is expected to reach the Senate floor until the August recess is over, though “things could move very fast in September,” he said.

In June, the House passed a bill, H.R. 4105, that would impose a three-year moratorium on Internet access taxes. That bill calls for a 31-member commission to explore interstate sales tax collection and would need a 19-member super majority to make recommendations to Congress.

“We favor a higher super majority [as in the Finance Committee's bill] to force consensus,” Micali said.

The DMA says that the House bill inevitably would lead to mandated tax collection on all types of direct marketing transactions, including catalog, mail-order and telephone purchases from out-of-state companies.

Micali declined to predict how the House and Senate might merge their two bills if the Senate passes one of its own.

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