Congress' decision: To tax Internet sales or not

WASHINGTON - The U.S. Congress may soon have to choose between Internet businesses and consumer groups, who want to keep sales taxes away from the Internet, and states and bricks-and-mortar businesses, who are pushing a sales tax plan that would open up collection of sales taxes across state boundaries.

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Congress may be asked to referee the two sides by deciding whether to approve a cross-state sales tax proposal intended to simplify the way sales taxes are collected across the U.S. states. The debate over a plan called the Streamlined Sales and Use Tax Agreement being pushed in state legislatures spilled over into the halls of Congress Thursday when the Congressional Internet Caucus hosted a panel discussion on the issue.

Proponents of the plan, sometimes called the Streamlined Sales Tax Project, say it's only fair that e-commerce companies pay the same taxes as bricks-and-mortar businesses. They argue that states are losing money that's rightfully theirs by not being able to collect sales taxes on e-commerce, catalog and telephone sales by companies based elsewhere. In a 1992 lawsuit, Quill Corp. v. North Dakota, the U.S. Supreme Court ruled that states cannot collect sales tax on businesses operating outside their borders because of the burden those businesses would face when trying to comply with thousands of local taxing jurisdictions.

"This effort is not about a new tax, it's not about punishing anybody or even affecting the Internet," said Steven Rauschenberger, a Republican state senator from Illinois. "It's really about modernizing the sales tax, so that the states get back to a simple ... fair and equitable tax system."

Opponents of the plan say sales taxes could cripple e-commerce, which still only makes up about 1.5 percent of the $750 billion in U.S. retail sales each year. They argue that the relatively small amount of sales tax states would generate, estimated by Amazon.com. to be about $2.4 billion spread across the 45 states with a sales tax, wouldn't compare to the potential harm to Internet sales.

"There isn't that much e-commerce at this point to maybe justify all this wrangling we've been doing the last couple of years of changing tax policy all around," said James Gilmore, a former Republican governor of Virginia. "This is a tax increase. Be aware of that."

While Rauschenberger downplayed the tax-increase potential under the Streamlined Sales Tax Project, Jean Cantrell, manager of government affairs for retailer Circuit City Stores, complained that Internet sales are getting a sales-tax break and therefore can sell products cheaper than can their bricks-and-mortar cousins. "We want an environment where all sellers play by the same rules so that we are not competitively disadvantaged by the retailer who can successful compete with us on the price of a wide-screen plasma television," she said. "Bottom line, we think it's the right thing to do."

Paul Misener, vice president for global public policy at Amazon.com, urged the congressional staffers in attendance to encourage long deliberation of the Streamlined Sales Tax Project. "This is not an easy one," he said of the sales tax debate. Congress can't punt on this -- the details matter."

Misener noted that the $2.4 billion impact on all states that Amazon projected is a fraction of the current $35 billion budget deficit in California alone. "The sky is not falling," he said."Collection of remote sales tax is not going to balance the state budget shortfalls by any stretch of the imagination."

The simplified sales tax is a separate issue from congressional efforts to permanently extend a moratorium on Internet use taxes and other taxes that aren't collected elsewhere.