Washington Outlook

Dorgan's Internet Tax Bill at Impasse in Senate Commerce Committee

By Larry Jones
July 17, 2000

After months of negotiations, Senate Commerce Committee Chairman John McCain (AZ) and Senator Byron Dorgan (ND) admit they have been unable to reach agreement on a compromise Internet tax bill that can attract broad based support. While discussions continue among McCain, Dorgan, and other Senators and their staffs, most are skeptical that the Senate will be able to approve a bill before Congress adjourns this session.

McCain and Dorgan are divided over what should be included in an Internet tax bill. Senator McCain wants to move legislation supported by the electronic commerce industry that would extend the existing moratorium on state and local taxes on Internet access fees, multiple and discriminatory taxes for an additional five years. McCain also wants to eliminate the grandfather clause in current legislation that protects states that currently have taxes on Internet access. But state and local groups have complained loudly that his bill does not address the more important concerns of state and local governments—the collection of sales and use taxes on remote sales.

State and local officials are also concerned about the length of the moratorium since the current moratorium is not set to expire until October 2001, which demonstrates there is no compelling need to act on legislation this year. Further, they have expressed concerns about the moratorium on Internet access fees. At a time when companies are bundling Internet access fees with telephone and cable services, the moratorium could cause state and local governments to lose tax revenues on these and other taxable services that are bundled.

In response to the concerns raised by state and local officials, Senator Dorgan introduced the Internet Tax Moratorium and Equity Act (S. 2775) on June 22 which would extend the current moratorium on Internet taxes for four years and provide a mechanism for collecting state and local use taxes on remote sales. However, there are provisions in the Dorgan bill that the Conference and other state and local groups find unacceptable. Among the "Big 7" state and local groups, so far only the National Governors' Association and the Council of State Governments have endorsed the Dorgan bill.

Under current law, local merchants are required to collect state and local sales taxes. However, the Supreme Court has ruled on two separate occasions that out-of-state (remote) merchants cannot be required to collect use taxes on similar sales to local residents because it would be overly burdensome and too costly for them to figure out and remit such taxes to thousands of state and local governments.

This has created an uneven playing field and given remote merchants an unfair competitive advantage over local merchants. The problem has been exacerbated by the Internet which allows customers to make unlimited purchases over the Internet from remote sellers. Further, it is undermining and eroding a significant state and local revenue source. In a recent study conducted by the University of Tennessee, it was estimated that state and local government will lose $20 billion by 2003. These losses will force state and local leaders to make tough choices as they seek to provide effective and efficient public services.

To address this problem, state and local governments are urging Congress to adopt legislation that will create a level playing field where state and local taxes are applied equitably to local retailers and remote sellers. The Dorgan bill attempts to move us in that direction. It would encourage state and local governments to simplify their sales and use taxes by adopting by a number of changes including uniform tax definitions for goods and services, uniform tax remittance forms and electronic filing methods, uniform audit procedures, and a single blended tax rate per state for all remote sales. For states that simplify their taxes, the Dorgan bill would authorize them to enter into an interstate sales and use tax compact and require remote sellers with more than $5 million in gross annual sales to collect and remit their taxes. Members of Congress would be given 120 days to disapprove the compact after participating states submit it to Congress. If they do not, the compact would become effective.

The Conference, the National Conference of State Legislatures and the National Association of Counties have voiced opposition to the single rate per state provision in the Dorgan bill. If adopted, it would eliminate the local option use tax on remote sales and make it impossible to create a level playing field because local retailers would still be required to collect both state and local option taxes while remote sellers would only be required to collect the single blended rate, which in many instances would be lower than the state and local option taxes. Many state and local leaders fear these dual competing rates would invite political pressure to eliminate the local option tax .

Senator Dorgan so far has been reluctant to change the single rate provision because he believes most Senators are convinced it would be too complicated for companies that sell to customers in multiple states to figure out the tax rates for thousands of different states and localities. However, the Conference and other state and local groups maintain that 21st Century technology is capable of addressing this concern without imposing any undue burdens on remote sellers.

State and local governments are working with Taxware International and other groups that are developing the technology and software that will provide remote sellers the appropriate tax rate for customers based on the zip codes of where they reside. Discussions are underway for making such software available to remote sellers free of charge so they would be able to collect both state and local use taxes.

The Conference is discussing alternative language with Senator Dorgan that would allow a phase in of local option rates on remote sales once the technology and software have demonstrated sufficient accuracy and the elimination of undue burdens on remote sellers. Four states are set to test this new technology and software later this fall.

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