Byline: Joanna Ramey

WASHINGTON — The battle in Congress over how Internet sales should be taxed was launched Wednesday, and if a brief clash between Sen. John McCain (R., Ariz.) and a Wal-Mart tax executive is any measure, the fight is going to be a fierce one.
McCain, who’s returned to his post as chairman of the Senate Commerce Committee after his failed presidential bid, held a hearing on extending the moratorium on new Internet taxes, which expires next year, until 2006 .
David Bullington, vice president of taxes for Wal-Mart Stores Inc., told the committee why brick-and-mortar retailers, even those with Internet sites, favor collection of state taxes on e-commerce: It’s an issue of fairness, he said.
“By perpetuating the status quo+Congress would be giving Internet and other remote retailers a de facto tax subsidy,” Bullington testified. “All retail businesses should compete on the traditional basis of price, selection and service.”
McCain, who is opposed to Congress enabling states to collect taxes on Internet purchases, scoffed at Bullington’s call for a “level playing field,” accusing the nation’s largest retailer of being duplicitous.
“Some of the small businesses that have shut down” because of competition from Wal-Mart’s low prices “may have a different view,” McCain snapped, arguing that the nation’s largest retailer’s fierce competitiveness could be viewed as “predatory pricing.”
Bullington replied that Wal-Mart’s position on Internet taxes doesn’t contradict the firm’s reputation for aggressive expansion.
The hearing coincided with release of a report from the congressional Advisory Commission on Electronic Commerce advocating extension of the moratorium, which is designed to block tariffs on Internet access fees and the like. The commission took no position on the sales tax.
Traditional retailers are joined by the National Governors’ Association and local governments in their Internet sales tax fight. As it stands, Internet, as well as catalog, sales are only taxed in states where a company has a physical presence.
When there isn’t a corporate presence, states already have the right to collect lost sales taxes from shoppers who make purchases via the Internet or catalogs. But this type of sales tax, called a use tax, is rarely submitted by consumers and states don’t pursue scofflaws.
State and local governments and retailers want Congress to allow them to band together to form a compact so taxes can be readily collected electronically for the 40 states with sales taxes. Locales are agitating for the compact because they fear potential erosion in their tax bases if Internet sales increase at the expense of non-virtual store sales. This sea change could be exacerbated, tax compact proponents argue, as traditional retailers spin off their Internet sites — as Wal-Mart has — to avoid having to collect sales taxes in every state where they have a presence.
State tax compact supporters want Congress to authorize the collection system as part of the Internet tax moratorium extension. But many moratorium advocates like McCain and House cosponsor Rep. Chris Cox (R., Calif.), fear an Internet-wide collection of sales tax would slow e-commerce’s growth.