Tax Moratorium Expires as Anthrax Distracts Senate

States could burden Net sales with levies


Concerns about bioterrorism at the U.S. Capitol preempted consideration of a time-sensitive Internet-related measure, the extension of the online tax moratorium, which expired yesterday.

The U.S. House of Representatives last week approved a two-year extension, far shorter than the five-year extension proponents originally wanted but easier to pass because of the controversy surrounding the bill. But the Senate failed to act by the end of last week, thus allowing the ban to expire. That means state and local governments could begin imposing access taxes, if they choose to.

Senate debate was cut short by the Capitol anthrax sweep, and the issue could resurface in the Senate this week.

The moratorium affected only Internet access taxes, which critics have assailed as akin to charging someone admission to enter a shopping mall. But the issue has been tied to the broader question of whether online sellers should collect sales taxes from all of their customers.

Simplicity Sought

Under current law, a business is required to collect sales taxes only in states where it has a physical presence. But nearly 40 states are involved in an effort to simplify sales taxes, create one rate per state and reduce the burdens on business for collection of sales taxes. Backers of this effort want Congress—in any extension of the access tax moratorium—to also signal support for expanded sales tax collection obligations if tax simplification can be achieved.

It's uncertain what will happen now that the moratorium has ended.

"Nothing—nothing—is going to happen on Monday," said Frank Shafroth, director of state/federal relations at the National Governors Association, who sees no clamor among the states for taxing Internet access.

But Mark Nebergall, chairman of The Internet Tax Fairness Coalition, which is backing the moratorium extension, said a failure by Congress to act would be a signal to the states "that it's OK for them to impose special taxes on electronic commerce." The action wouldn't come from state legislatures, but from state revenue authorities interpreting current laws, he said.

A study released this month by the Center for Business and Economic Research at the University of Tennessee in Knoxville estimates that e-commerce this year is likely to cost state and local governments $13.3 billion in lost tax collections. By 2006, that loss will reach $45.2 billion.

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