The debate over whether the Internet should remain a huge tax-free marketplace for U.S. shoppers probably will not be resolved in 2004, according to policymakers and experts who cited the upcoming presidential election as a political disincentive to action as well as stubborn resistance by some lawmakers and business interests to any effort to tax electronic commerce.
That prospect would be a setback for a quiet but dogged effort led by state officials and some of their allies in the business community to get Congress to authorize state governments to collect taxes on their residents' Internet purchases.
"I would be stunned if there was a vote on this in a presidential election year," said Bartlett Cleland, associate general counsel for the Information Technology Association of America, a high-tech lobbying group that has lobbied against the plan.
The co-chairman of the states' working group on Internet sales taxes agreed. "I don't think anyone doubts this is going to be a tough sell in Congress during an election year," said Diane Hardt of the Streamlined Sales Tax Project.
Nevertheless, Hardt's group is working overtime to persuade more retailers to voluntarily collect taxes from their customers in every state that has a sales tax.
"There are huge financial incentives for the states to get this done, and the states would like to get this money as soon as possible," she said.
Some state legislatures have already voted to modify their sales tax codes to accommodate the plan, but the endgame almost certainly will play out in the halls of Congress. Reps. Ernest Istook (R-Okla.) and William Delahunt (D-Mass.) introduced a bill earlier this year that would give the congressional go-ahead to the sales tax plan, but that proposal will die if it does not get a vote before the end of 2004.
The stakes -- by some estimates -- are high. An oft-cited 2001 study by two professors at the University of Tennessee said that the amount of uncollected taxes on e-commerce will grow to $45 billion by 2006.
States have long argued that it is unfair that they can't tax all Internet commerce, especially when sales taxes are a principal way to ensure that business activities support vital local services like education and transportation services.
Collecting taxes on online retail transactions is equally appealing to the so-called "bricks-and-mortar" business community, which sees the Internet's tax-free status as a powerful force discouraging shoppers from heading out to physical stores. Even online retailers like Wal-Mart, Target and Amazon.com, which initially balked at the idea, have started to support it this year. Wal-Mart and Target, which maintain both physical and online stores, are particularly anxious to eliminate any state claims on previously unpaid taxes on online sales.
On the other side of the debate are groups like the ITAA and the Microsoft-funded Association for Competitive Technology, which oppose the plan as currently written. These groups say they support simpler state taxes but don't want to see the Internet economy sucked dry by over-taxation.
Rep. Istook remains optimistic that his bill will pass, said spokeswoman Micah Swafford. She noted a 2001 vote in which the House of Representatives voted by a 2-1 margin in favor of a nonbinding resolution supporting the online sales tax plan.
But given the strong anti-tax sentiment among the House Republican leadership, some proponents of the plan are looking to the Senate for a better reception, said Maureen Riehl, vice president of state and industry relations for the National Retail Federation.
"There's just not as much of an anti-tax crowd in the Senate. They don't see this issue like many House Republicans do. The senators seem to understand that what we're talking about here is collection, not a new tax," Riehl said.
Rallying Around States' Rights
Even though the House leadership under Majority Leader Tom DeLay (R-Texas) is opposed to the plan, many of its ardent supporters are Republicans who have practically built their careers as anti-tax hawks. Istook, the lead sponsor of the House bill, is well known for being tough on taxes, as is Mike Enzi (R-Wyo.), sponsor of a similar bill in the Senate. Other conservative Republicans backing the state effort include Reps. Ray LaHood (Ill.) and Spencer Bachus (Ala.), and Sens. Chuck Hagel (Neb.) and Kay Bailey Hutchison (Texas).
For these lawmakers, online sales taxes are a matter best left to the states.
"Some of those are very staunch states'-righters," said Richard Prem, director of global Internet taxation for Amazon.com. "When people look at these issues, they realize that there's a more fundamental issue than just taxes on the line here."
Two of the senators currently supporting the states on issues of taxing Internet access and sales -- George Voinovich (R-Ohio) and Lamar Alexander (R-Tenn.) -- are former governors and remember the difficulties they faced in handling tight state budgets, Prem noted.
Some lawmakers are sympathetic to the complaints of large, established retailers in the offline world that say it is unfair for their online counterparts to get a tax break, said Gary Gudmundson, spokesman for the Ohio Department of Taxation. "Traditional retailers provide jobs, they pay taxes ... How can you ignore them? Not to mention that they're much bigger players financially."
At this time, 45 states require citizens to pay sales taxes on their purchases, even if they're made online or in another state. Few online businesses collect those taxes because there's no way for other states to force them to hand over the money. That stems from a 1992 Supreme Court decision that says businesses can't be forced to collect taxes for a different state than the one they're located in. In that ruling, the court said Congress can authorize the collection of Internet and catalogue sales taxes across state lines, but only if the states simplify their tax systems first.
To do that, the Streamlined Sales Tax Coalition must develop a system for the states to get their dues while making sure that smaller online businesses are not swamped by having to comply with thousands of different tax jurisdictions.
Seeds of a Deal?
If some technology lobbyists have their way, the Internet sales tax effort will fade away.
NetChoice, a lobbying group that represents online auction giant eBay and travel Web site Orbitz, said that the plan's supporters have not done enough to answer difficult questions about how it will work, including how to certify tax software vendors, educating online merchants and how the states will exchange revenue.
The Direct Marketing Association (DMA), meanwhile, said in a June study that the amount of money states could get from Internet sales taxes might be far less than they claim -- just $3.2 billion by 2006.
The states might win more support from the business community if they cut a range of other corporate income and franchise taxes, said Stephen Kranz, tax counsel for the Council on State Taxation.
"That could very well be the play that earns the states the momentum they need to get their tax plan approved," Kranz said.
Neil Osten, director of telecommunications and commerce at the National Conference of State Legislatures, said some states fear that additional tax breaks could cancel out any increased tax revenues collected on Internet sales.
Riehl of the National Retail Federation said that one possibility under consideration is combining the sales tax plan with a proposal to limit how states charge business activity taxes.
Business activity taxes include franchise taxes and business license taxes that usually affect only the companies that are established in the local area where the tax is applied. Some states have angered companies by seeking to expand the taxes to more kinds of corporate activity including sending salespeople or delivery trucks that cross state lines for even just a few minutes or hours.
House lawmakers introduced legislation that would bar states and localities from levying businesses activity taxes against out-of-state companies unless the company has a store, shipping center or other property physically located in the taxing jurisdiction.
Riehl said that the idea is a good one but has no guarantee of success.
"We will know by the first of March whether this thing will get the traction it needs next year or not."
washingtonpost.com's tech policy team members summarize major developments in 2003 and look forward to what 2004 holds for the debate over Internet taxes and the battles to can spam and stop Internet crime. 
