Legislators debate proposals for e-commerce taxes

Congress is weighing legislation aimed at helping state and local governments

resolve a tax-collection problem that has plagued them for decades, but

has failed to spark lawmakers' interest until the explosion of electronic

commerce.

Several current bills would clear the way for states to collect sales

and use taxes on catalog and Internet transactions that occur between a

buyer in one state and a merchant in another when the merchant has no "physical

presence," such as an outlet or warehouse, in the buyer's state. Most shoppers

who buy from out-of-state merchants are exempt from paying sales tax to

the seller's state, but are supposed to pay use tax to their own state and

local governments.

Members of the House Judiciary Subcommittee on Commercial and Administrative

Law recently held a hearing on three of the bills, aimed at fixing the problem

on behalf of state and local governments — which depend on sales taxes to

support police, fire, and other crucial services — and calming fears about

the negative effect of e-commerce on their tax bases.

One of the bills, sponsored by Rep. Spencer Bachus (R-Ala.), would set

up a sales tax compact involving at least 20 states. The states in the compact

would agree to simplify and harmonize their tax codes in exchange for the

right to collect the use tax on purchases by residents of their states from

outside retailers.

In the past, the Supreme Court has ruled that the thousands of local

tax jurisdictions across all the states would impose too great a burden

on out of-state retailers who would have to comply with their varied codes.

But in its most recent ruling, the court said that if Congress found a way

to simplify the tax system, merchants could be compelled to collect the

tax.

Congress has wrestled with the issue before, but as e-commerce grows,

state and local officials are putting enormous pressure on lawmakers to

act, said Karl Frieden, a partner at Arthur Andersen, in Chicago, and author

of "Cyber Taxation: The Taxation of E-Commerce."

The Bachus bill appeals to states because, although it would not require

a single tax rate in jurisdictions within a state, it would authorize states

themselves to set a single rate, Frieden said. The compact would be designed

to provide a framework for a more unified and simple sales and use tax system

without intruding on states' rights to set and regulate the sales tax locally.

But Bachus' bill and the others face strong opposition from members

of Congress who oppose any tax law changes that might jeopardize the growth

of e-commerce, said Frieden, who believes that none of the bills debated

at the hearing are likely to pass this year.