Although the Senate agreed to ban federal taxes on the Internet, it would allow states to begin collect sales taxes five years from now. The bipartisan deal is expected to pass Congress and receive support from the White House.

by Beth Cox [June 15, 2001]

However, the deal apparently would open the door for increased collection efforts for existing sales taxes, the bulk of which now go unpaid for sales made over the Internet.

The moratorium is scheduled to expire in October. The Internet Tax Freedom Act, passed by Congress in October 1998, imposed a three-year moratorium on Internet access taxes and on multiple or discriminatory taxes on electronic commerce.

The House voted last year to extend the moratorium.

However, the bipartisan compromise includes a concession to state and local governments (most of which depend on sales taxes for about a third of their revenues) giving states five years to simplify their sales tax-collection systems, according to a report in USA Today online. If Congress approves the plan, taxes on almost all Internet and catalog purchases would then be collected.

The no new taxes part clearly is good news for ISPs and e-commerce and portal site operators. Still, collecting sales taxes and figuring out how to pay them in all 50 states would likely be difficult and expensive for site operators.

Internet sales at present are handled the same as catalog and telephone sales: If the retailer has a store in the purchaser's state, a sales tax is supposed to be added to the bill. But the Supreme Court has ruled that companies cannot be required to collect taxes in states where they have no physical presence.

Pure-play e-tailers have contended that if they are required to collect sales taxes and pay them to the appropriate agencies, they are looking at figuring out how to accommodate about 7,600 state and local taxing jurisdictions, each with different rates and rules.

"We've been working for well over two years to allow the Internet to grow without discounting states' needs for resources," Sen. John Kerry, D-Mass., was quoted as saying.

Under the proposal, states would have to create uniform definitions for goods and services. They also would have to agree on one national sales tax rate or at least one rate per state, and Congress would have to approve the plan. Businesses with $5 million or less in annual revenue would be exempt.

A spokesman for the Bush administration was quoted as saying that the White House supports the bipartisan plan.

For current state rates, see this page.

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