The original three-year e-tax moratorium, established by the Internet Tax Freedom Act introduced by Sen. Ron Wyden (D-Ore.) and Rep. Chris Cox (R-Calif.) was enacted in 1998. The e-tax moratorium was extended for another two years in 2001 through new legislation sponsored by Wyden and Cox. Given their success in the past, small business e-commerce initiatives could once again benefit from the bi-partisan duos past success, since the two have once again filed bills (H.R. 49 and S. 51) that would keep the Internet a sales tax-free zones.
The proposed Cox-Wyden bill prohibits three types of taxes that they say "unfairly single out" the Internet, including taxes on Internet access, double taxation (for example, by two or more states) of a product or service bought over the Internet, and discriminatory taxes that treat Internet purchases differently from other types of sales.
The legislation will be considered by the Commerce Committee in the Senate, and by the Energy and Commerce Committee and the Judiciary Committee in the House of Representatives.
As they have in the past, both Cox and Wyden are seeking a permanent ban on Internet taxes but it is more likely Congress will settle on another extension as legislators work with cash-strapped states seeking to impose sales taxes on online purchases.
Currently, sales and use taxes are owed on all online transactions, but states are prohibited from requiring remote sellers to collect and remit those levies. A 1992 U.S. Supreme Court decision said states can only require sellers that have a physical presence or "nexus" in the same state as the consumer to collect so-called use taxes.
The court ruled that the current patchwork of roughly 7,500 taxing jurisdictions across the country is too complex and burdensome for online retailers to charge and collect sales taxes. In order to collect the taxes, the court ruled, states would need to first simplify the existing system.
In November, representatives from 32 states approved model legislation designed to create a system to tax Web sales. Spearheaded by the National Governors Association (NGA), the Streamlined Sales Tax Project (SSTP) would require participating states to have only one tax rate for personal property or services effective by the end of 2005. Included in those services would be online sales.
The coalition of states voted to require participating state and local governments to have only one statewide tax rate by 2006 for each type of product taxed.
The NGA launched the STTP in 2000 with the long-term goal of presenting Congress and the courts with a system that would allow the states to collect sales taxes on online sales and catalogue purchases.
Even though the e-tax ban proposed in the new legislation will not likely be permanent, at least small businesses operating e-commerce sites might enjoy a couple of years beyond the reach of a coordinated state sales e-tax plan. Under the SSTP model legislation, states will develop uniform product codes and sourcing rules, uniform definitions of what is taxable, and simplify administrative policies. They would then provide software free of charge to retailers that would calculate, collect, and remit the taxes owed on remote sales.
If at least 10 state legislatures approve the provisions of the agreement, court and congressional approval would then have to follow. The effort, if successful, would be the first overhaul of the nation's sales tax policy in 40 years, and the first time states had acted together to significantly restructure the system.
Although the process still faces many state and federal legislative pitfalls and, if successful, is still at least two or three years away, the prize for the states is well worth the wait. A report by the University of Tennessee last year estimated that all 50 states could collectively lose more than $45 billion in Internet sales tax revenue in 2006.