Byline: Joanna Ramey

WASHINGTON — Senate Commerce Committee chairman John McCain (R., Ariz.), cast some doubt Wednesday on the future of legislation that would require Internet companies to collect sales tax on e-commerce, saying it “will be difficult” for lawmakers to reach a consensus on the topic.
Requiring a nationwide Internet sales tax system is currently being considered in two bills dealing with the related issue of extending the moratorium on new Internet taxes, like tariffs on Internet access service. The moratorium — widely supported in Congress while the ‘Net sales tax isn’t — is due to expire in October.
“Congress must act before the Internet tax moratorium expires,” McCain said before the start of a hearing on the sales tax issue. “Reaching a consensus by then on the [sales tax] will be difficult. All interested parties must be willing to make significant sacrifices.” However, committee member Sen. Byron Dorgan (D., N.D.), appeared somewhat more optimistic, saying, “I believe very strongly we will reach agreement on this committee. I don’t know where it will go from there,” he acknowledged, reflecting mixed support for the issue in the Senate and downright opposition in the House among Republican leadership.
States and locales already have the ability to collect taxes on Web sales transacted in their jurisdictions, but only from consumers — a practice that is considered impractical and impolitic. The only time e-commerce can now be taxed directly is when an e-tailer has a physical presence in a taxing jurisdiction, like a store or warehouse.
About 32 states want Congress to give them authority to enter into an interstate system to collect sales taxes. But before that happens, states and locales will have to overhaul the labyrinth of 7,600 widely different sales tax jurisdictions and come up a simpler system of assigning, say, one sales tax per state. The process of simplification, in fact, is already under way among the pro-‘Net sales tax camp, as the system’s complexity is one argument that’s been used against levying yet another tax.
Various arguments have been put forth in favor of Congress enabling a ‘Net-wide sales tax system, as well. One pitch made by several retailers is that if brick-and-mortar businesses have to shoulder the cost of collecting sales tax, then it’s only fair that e-tailers do the same. The bulk of the 45 states with sales taxes are concerned that consumers will shift their shopping to the ‘Net, thus costing governments much-needed tax revenue, an argument McCain and other senators said isn’t panning out.
“Personally, I have not seen evidence of the sales tax revenue losses predicted by the states and local governments when we took up this issue a few years ago,” McCain said. “Even so, the Main Street retailers have a legitimate fairness argument, when they see customers come to the store to locate items they want to purchase, only to leave and order the items over the Internet just to escape the sales tax.”
Testifying at the hearing, Frank G. Julian, operating vice president and tax counsel with Federated Department Stores, said the chain is pitching the need for an Internet sales tax collection as a means to get states and locales to simplify their tax codes. Julian said Federated, with 400 stores in 33 states, collects about $1 billion in taxes a year and spends “tens of millions” doing the job.
“The burdens of collecting these taxes are very real,” said Julian, who added he can’t estimate how much simplification would save the retailer but the amount would be significant. Julian testified as a member of the Internet Tax Fairness Coalition, which comprises mostly high tech companies like America Online and Cisco Systems.
Julian said Federated is throwing its support behind an Internet sales tax bill being sponsored by Sens. Ron Wyden (D., Ore.) and Patrick Leahy (D., Vt.) that would require states to create a tax simplification plan that Congress would first have to approve before granting the Internet tax-collecting authority. Julian said withholding congressional approval is essential to ensuring states create a workable sales tax system. Also helping retailers’ bottom lines, the Wyden-Leahy bill would require states to provide an unspecified tax collection allowance for businesses.
In pushing the Internet sales tax because it’s seeking simplification of tax assessment and collection, Federated has departed from other major retailers involved in the issue, such as Wal-Mart Stores, Kmart Corp., Target Stores, and Ames Department Stores, which are stressing the need for fairness between e-tailers and traditional stores when it comes to collecting sales tax.
“Although I have a lot of respect and admiration for my fellow retailers, this is one instance where they are wrong,” Julian testified. “The sky is not falling on brick-and-mortar retailers. Many of the once feared dot-coms have become dot-bombs. Our weakening economy is having a profound negative impact on the fledgling electronic commerce sector.”
The retailers Julian targeted belong to the E-Fairness Coalition, which is largely composed of stores, shopping mall companies, and retail associations. The coalition is backing another bill, introduced last week, that has a bi-partisan group of co-sponsors, including the lead sponsors, Dorgan and Mike Enzi (R., Wyo.) Unlike the Wyden-Leahy bill, the Dorgan-Enzi bill from the start would enable participating states to collect the ‘Net sales tax, provided they create a simplified tax system.
Peter Lowy, chief executive officer of shopping mall concern Westfield America, testified that the coalition “considers it absolutely essential that states be given some assurance” that if they simplify their tax system “they will receive authority for remote sellers to collect user taxes.”