McCain: Compromise Possible In Internet Tax Debate

Senate Commerce Committee Chairman John McCain, R-Ariz., is trying to rally support to extend the moratorium on new Internet taxes, but acknowledges that passage likely will happen only as part of a compromise that includes broadening the states' authority to collect existing sales taxes on Internet transactions.

Brokering a deal is in the early stages. McCain, who is not a fan of expanding the states' collection authority, seems willing to concede some ground if states and localities take some steps to simplify their tax schemes.

"I have met frequently with members of Congress, including several on the committee, who are interested in joining me to extend the Internet tax moratorium, but only as long as we take action to broaden the states' authority to collect sales tax from remote sellers, including those conducting business over the Internet," McCain said at a March 14 Commerce Committee hearing.

McCain and others on the Commerce Committee are working to reach a consensus on a proposal that can be put in place before the Internet tax moratorium expires in October. The moratorium was first put in place in October 1998.

Similar moves are under way in the House. House Policy Chairman Christopher Cox, R-Calif., introduced Feb. 8 the Internet Non-Discrimination Act to ban Internet access taxes and to extend for five years the moratorium on multiple and discriminatory taxes on the Internet.

The moratorium allows states to collect existing sales taxes on Internet purchases, but the difficulty of doing has, thus far, made states reluctant to do so.

The controversy is fueled by local retailers, who have seen customers come into their stores, locate the items they want and then leave to order the items on the Internet, escaping the sales tax, McCain said.

While this may be a fair argument, McCain warned that a number of difficult decisions must be made to reach some middle ground to satisfy all the parties involved. State and local governments must simplify sales tax systems before Congress will consider subjecting remote sellers to the reach of more than 7,000 taxing jurisdictions in the United States, he said.

"I do not think that is too much to ask," McCain said. "The states and localities are asking us to overturn long-standing limits on their ability to tax out-of-state businesses and transactions, put in place to ensure that myriad taxes do not create an undue burden on interstate commerce."

Wyoming Gov. Jim Geringer, testifying on behalf of the National Governors' Association and as co-chair of NGA's E-Governance Task Force, told the committee that many states are examining new approaches that would simplify tax and revenue schemes.

"We can and will craft a simplified tax structure that is close to the people, fair to both businesses and customers, and equally applicable to all transactions," Geringer said.

He pointed to the success of the Streamlined Sales Tax Project, which is model legislation to simplify state tax systems and has been introduced in 19 states. The legislation creates a multistate, compact, unifying tax system and obtains authority to require out-of-state Internet merchants to collect and remit sales and use taxes, he said.

The project has gained momentum in recent weeks. On March 7, Minnesota became the 19th state to introduce legislation.

Massachusetts Lt. Gov. Jane Swift told the committee that Internet taxation could prove disastrous for the high-tech industry and put many high-tech jobs at risk. Internet taxation will hinder growth when the economy can least afford it, she said.

Dot-coms are not putting the local retailers at a disadvantage, Swift said. Some dot-coms that were once the toast of Wall Street are now auctioning off the remains of their companies, she said.

Taxing the businesses that remain would force many to close their doors, Swift said. "That would be the equivalent of tossing them an anchor when they need a life vest," she said. People would lose jobs, "because government can't keep its hand out of the cookie jar," she said.

Those who oppose extending the moratorium say it is unfair to tax items only when they are purchased over the counter.

"There is no sound tax policy that supports a tax being collected on a shirt or a music recording or computer sold through a local store, but not collected when the same product is sold by mail order or through the Internet," Elizabeth Harchenko, director of the Oregon Department of Revenue and chair of the Multistate Tax Commission, told the panel.

Similar economic activities should be taxed in similar ways to ensure a level playing field among competitors, she said.

While arguing in favor of taxing Internet transactions, Harchenko said states recognize they must simplify state and local taxes so that collecting them does not create an undue burden on interstate commerce.

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