Stating the Case for Online Sales Taxes

The Internet has Congressman Ernest Istook all worked up. That was plain to see at the press conference he held on the Hill last week. But it wasn't music piracy, child porn, ID theft or the other usual hot-button technology topics were riling the Oklahoma Republican.

Istook took his time on the steps of the Cannon building, just across the street from the Capitol, to talk about taxes. Sales taxes to be exact. His new bill, introduced last week, would offer the federal government's stamp of approval for a national online sales tax plan.

Istook is a proud Republican -- not exactly a pro-tax poster child. But Republicans also call themselves the party of states' rights. Simply put, the Washington politicos should keep their grubby hands out of the states' affairs. And that means if they want to tax Internet sales, so be it.

Most states require citizens to pay use taxes on things they buy online or in another state, but few consumers comply because it's almost impossible to enforce. Not only that, a 1992 Supreme Court decision forbids the states from forcing businesses to pay up if they're located in another state.

That's why people in Washington, D.C., like buying big-ticket items in sales-tax-free Delaware. It's what sends Mainers over the border to buy their liquor in New Hampshire. It's what is sending more people than ever onto the Internet to buy just about anything.

The national sales tax plan would throw all this aside and let the states take the money they say they need to keep vital services up and running.

That argument has found little support on Capitol Hill so far, prompting Istook and William Delahunt (D-Mass.) to take the first step.

"If Congress does nothing, then we will be besieged with larger-than-ever requests that Congress make up the difference to support local schools, roads, public safety and hospitals," Istook said.

Istook and his congressional allies are proof that a quiet effort, led mostly by state-level tax experts and a handful of their allies in the business world, is starting to pay off. Officials who gathered under the auspices of the "Streamlined Sales Tax Project" cleverly drafted an Internet sales tax plan that offers something to everyone: States get the money to shore up their cash-starved budgets, online retailers get an easy way to collect taxes for many different masters and offline retailers don't have to feel like they're getting a raw deal because thrifty shoppers choose e-commerce instead.

The result is that for the first time in the short history of the World Wide Web, Internet shopping could be taxed like any other business.

But the taxman is not here yet. After all, it is unclear whether Congress will approve any proposal that boils down to "taxing the Internet." Nor is it certain whether the major retailers that would be most affected will actually endorse the online sales tax campaign.

One of the chief obstacles to the legislation is the House Republican leadership which, under Majority Leader Tom DeLay (R-Texas), advocates a decidedly anti-tax platform.

Rep. Chris Cannon (R-Utah) believes it "very unlikely" that the House will enact the legislation.

Rep. Rick Boucher (D-Va.), who co-chairs the U.S. Congressional Internet Caucus, shares Cannon's opinion.

"I would rate the chances of this bill passing at the present time at close to zero," said Boucher.

Steve Kranz, tax counsel for the Council on State Taxation and a supporter of the online sales tax legislation, said action on the bill needs to happen now because it won't have a chance in the 2004 election season.

Even if the legislation were signed into law, it would take months to change the way the system operates. That includes certifying tax software vendors, educating and auditing online merchants, exchanging tax revenue between the states, dealing with popular "sales tax holidays" to encourage more people to shop and dozens of other daunting tasks that will cost the states time and money.

Powerful lobbyists for online and online-related businesses that are fighting to keep their tax-free edge over their brick-and-mortar counterparts have helped fuel the opposition on Capitol Hill.

The Direct Marketing Association (DMA), whose members would be affected by the sales tax plan, released a study in June undercutting estimates of how much revenue would be generated by Internet sales taxes. The study said that the amount of uncollected taxes on e-commerce would be $3.2 billion by 2006, far lower than the $45 billion projected in an often-cited 2001 study by two University of Tennessee professors.

Online auction site eBay is against the plan as it's currently written. The Information Technology Association of America, an influential technology trade group that lobbies on behalf of more than 500 of the nation's largest high-tech companies, also stands against it.

NetChoice, a lobbying group that represents online retailers, said that supporters of the sales tax plan leave too many questions unanswered and instead are "rushing to sneak this legislation through Congress."