Byline: Joanna Ramey

WASHINGTON — Traditional brick-and-mortar retailers may have lost a battle in the House on Wednesday — when the moratorium on Internet sales tax was continued — but they’re feeling bullish about eventually winning the war in Congress over requiring all Internet sales to be taxed.
Department stores and mass retailers had hoped to see their tax issue piggy-backed onto legislation extending a moratorium on new Internet taxes, such as tariffs on monthly access fees, through October 2001. The current moratorium on Internet sales tax sailed through the House on a 352-75 vote.
However, during five hours of debate, a bipartisan group of lawmakers in favor of sales tax-equity on the Internet made it clear their issue would be dealt with. Retail industry officials had feared the sales tax issue might be shelved during the length of the moratorium if it weren’t part of the bill.
In a nod to the sales-tax camp, the House voted 289-138 on a non-binding resolution, sponsored by Rep. Ernest Istook (R., Okla.), for Congress to provide a “roadmap” for states to develop an Internet tax collection system. It is considered a first step in furthering a binding measure, which Rep. Spencer Bachus (R., Miss.) told his colleagues he plans to soon introduce. Hearings on Internet sales tax collection are also scheduled for later this month.
“It is telling,” said Lisa Gilbertson, tax director with the International Mass Retail Association, after the moratorium vote, “that even though sales taxes were not included in the bill, it was virtually the only topic of discussion in the debate.”
Several forces are keeping the Net sales tax issue alive, the strongest being 36 governors who are worried about their state tax bases being eroded if traditional retail sales decline as Internet volume increases. For their part, brick-and-mortar retailers are agitating for change because it costs them to collect state and local sales taxes whereas Internet retailers are not burdened with the task.
As it stands, Internet, as well as catalog companies, are only required to collect sales taxes for locales where the company has a physical presence, like a store or warehouse. When there isn’t such a presence, states have the right to collect sales taxes from shoppers who purchase goods from a tax-less remote source. But this type of sales tax, called a use tax, is rarely submitted by consumers, and states do not pursue them as scofflaws.
“It is completely unfair to our brick-and-mortar stores,” said Rep. Melvin Watt (D., N.Y.), of the current system.
To better collect the lost tax revenue, states want Congress to allow them to band together to form a compact to collect Internet taxes for the 45 states with sales taxes. Traditional retailers support the effort.
Said Rep. Bill Delahunt, “The digital divide shouldn’t be extended to American business,” said Rep. Bill Delahunt (D., Mass.), who cited a University of Tennessee study, which projected that by 2003, states could lose about $20 billion annually in uncollected Internet sales taxes, up from $525 million last year.
The moratorium’s continuation was lauded by supporters as a measure needed to maintain the Internet’s growth. Critics said the legislation was meaningless, and simply amounted to political posturing in an election year since fears that locales are angling to tax the Web haven’t panned out.
Retailers have been fighting the perception that their cause involves instituting a new tax. It’s a perception that still lingers in the Senate, where Senate Commerce Committee Chairman John McCain (R., Ariz.) has a bill that would permanently ban collection of Internet sales taxes.
“It’s a hot potato because there is a lot of hype about the Internet and taxes,” said Scott Cahill, vice president of government and industry affairs at the National Retail Federation.
It is unclear how quickly the Senate might take up the House-passed moratorium bill “We don’t want this to jump from the House to the Senate, and move through the Senate too quickly,” Cahill said, adding that the truncated legislative calendar this election year might keep the controversial issue off the agenda.