*Senators Introduce Bill Strengthening Nexus Protection

Saying that new taxes could imperil the booming Internet economy, Senators Judd Gregg (R-NH) and Herb Kohl (D-WI) yesterday introduced legislation that would prevent states from forcing out-of-state businesses, which have no physical connection to the state, to collect sales taxes on the state’s behalf.

The bill, called the “New Economy Tax Simplification Act” would update and strengthen the nexus standards for the 21st Century economy, ensuring that intangible sales, web pages and servers do not cause nexus.

Gregg said that the existing nexus rules, based upon two prior Supreme Court decisions the National Bellas Hess case in 1967 and Quill case in 1992, established the power of state tax authority to be limited by nexus — or the scope of a company’s connection to the taxing state.

Under the Gregg/Kohl proposal, however, nexus standards are more well-defined and extended to the Internet.

“The bill…extends the approach that currently governs catalogue sales to the Internet…It prohibits states from forcing businesses to collect sales taxes for states in which they do not have a physical presence,” said Gregg. “Internet transactions have many of the same qualities as catalogue sales so applying the tax regime that governs catalogue sales to the Internet makes good sense. Adopting this approach also gives clear guidance to business owners who need to know when they are going to be subject to tax.”

According to the Gregg/Kohl proposal, the following does not constitute a physical presence for establishing a nexus presence:

* The solicitation of orders or contracts for tangible or intangible property or services that are approved outside a State and are fulfilled from a point outside a State;

* The presence or use of intangible property in a State, such as patents, copyrights, trademarks, logos, securities contracts, money, deposits, electronic or digital signals and web pages;

* The use of the Internet to maintain a Web site accessible by customers in a State;

* The use of an Internet Service Provider (ISP), On-line Service Provider, or other types of Internet access providers, or World Wide Web hosting services to maintain, take or process order via a web page site or server located in such State;

* The use of any service producer for transmission of communications by cable, satellite, radio, telecommunications or similar systems;

* The affiliation with a person located in a State, unless the person is an “agent” of the business entity who meets the substantial physical presence standard;

* The use of independent contractors or representatives for warranty or repair services.

“Our bill goes directly to the heart of the Internet tax debate,” Gregg said. “It provides clear rules of the road for all parties involved. It sets up clear nexus standards for the 21st Century. It avoids the burden of subjecting electronic commerce to countless court battles on a state-by-state basis. It safeguards the sovereign right of states to determine their own tax status and it protects remote businesses from unfair and burdensome tax collection and audit requirements, through the establishment of safe harbors.”

In its final report, the Advisory Commission on Electronic Commerce recommended that Congress clarify the definition of nexus or “presence” thresholds that businesses must meet to fall under state taxation guidelines, among other provisions. Gregg said that he supports the report.

The NETSA bill is being supported by a variety of large and small businesses, ranging from Garnet Hill of Franconia, New Hampshire, Dell Computer Corporation, The Walt Disney Company, Federated Department Stores, the American Electronics Association, the Direct Marketing Association, Sempra Energy and the California Manufacturers Association.

Moreover, The Senate Commerce Committee, chaired by Sen. John McCain, (R-AZ) will hold a hearing today on bill S.2225 that would extend the existing moratorium on Internet taxes through calendar year 2006. McCain introduced the bill March 21.

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