Internet Tax Bills Face Legislative Hurdles

Internet Tax Bills Face Legislative Hurdles

By Neil Munro
Senior Writer

The collection of taxes from sales via the Internet will be made technically easy by new software, but contentious legislative battles will decide whether such tax collection is politically possible, industry and government officials say.

One emerging issue is whether each online transaction should be taxed as a product or a service. Sales of services are taxed much less frequently by states and counties than the sales of products.

"This definition may be critical ... [and disagreement] may not be surmountable," because more transactions involve services such as database access or remote alarm monitoring, said Gary Cornia, who is chairing an industry-government group formed by the Washington-based Federation of Tax Administrators to hammer out a compromise solution by the end of 1998.

The main issue yet to be decided in this three-cornered battle between the courts, the states and the industry is whether local governments have the right to collect taxes from out-of-state merchants selling to state residents.

In 1992, the Supreme Court decided this so-called "nexus" issue in favor of the mail-order companies, which do not have to collect sales taxes levied by the states, except for those taxes levied by the companies' home states.

State officials argue that new technology will ease collection of sales taxes and point to Taxware International Inc., based in Salem, Mass., which sells software via companies such as Netscape Communications Corp., Mountain View, Calif., that allows small and large companies to gauge taxes due from sales of 1,000 types of products and services.

The software, which tracks taxes in almost 6,000 jurisdictions, as well as taxes levied in Europe, Canada, Brazil and several other states for a monthly cost of $20 up to several thousand dollars, will soon be upgraded to ease the electronic filing of collected taxes, said Dan Sullivan, the company's chief executive officer.

Another Internet tax-tracking product is sold by Vertex Inc., Berwyn, Pa.

Forecasts for online sales predict a rapid increase, with some projecting sales of more than $1 trillion after 2002, mostly because of rapid growth in sales to companies rather than to consumers. Already, several computer companies, including Dell Computer Corp., Austin, Texas, and Gateway 2000, North Sioux City, S.D., are annually selling several billion dollars worth of hardware and software via tax-exempt mail-order and Internet purchases by businesses and consumers.

In Washington, industry officials are pushing for a federal freeze on state and local taxation of Internet commerce, and are backing emerging House and Senate bills that would impose a multiyear freeze. The two bills share the same name, the Internet Tax Freedom Bill, but contain different provisions following various compromises between advocates for industry and local governments.

House photo Rep. Chris Cox, R-Calif.

In mid-January, industry lobbyists reported progress from talks between Utah Gov. Mike Leavitt and Rep. Chris Cox, R-Calif., the chief backer of the House's tax bill. However, these talks have not led to a compromise, countered Raymond Scheppach, director of the Washington-based National Governors Association, which is lobbying heavily against Cox's bill.

Without approval from the NGA, the bills face tough sledding, partly because Congress' debating schedule is set by top Republicans, including Senate Majority Leader Trent Lott, R-Miss., and House Speaker Newt Gingrich, R-Ga.

"The NGA has made a very strong impression on Lott and the speaker," said Kenneth Silverberg, chief lobbyist for the anti-tax alliance, the Media Tax Group, which is funded by companies such as America Online Inc., Dulles, Va., and the Washington Post Company, which owns this newspaper.