Several bills allow states to collect taxes on catalog and Internet transactions that occur between a buyer in one state and a merchant in another when the merchant has no 'physical presence'
Congress is weighing legislation aimed at helping state and local governments
resolve a tax-collection problem that has plagued them for decades, but
has failed to spark lawmakers' interest until the explosion of electronic
Several current bills would clear the way for states to collect sales
and use taxes on catalog and Internet transactions that occur between a
buyer in one state and a merchant in another when the merchant has no "physical
presence," such as an outlet or warehouse, in the buyer's state. Most shoppers
who buy from out-of-state merchants are exempt from paying sales tax to
the seller's state, but are supposed to pay use tax to their own state and
Members of the House Judiciary Subcommittee on Commercial and Administrative
Law recently held a hearing on three of the bills, aimed at fixing the problem
on behalf of state and local governments — which depend on sales taxes to
support police, fire, and other crucial services — and calming fears about
the negative effect of e-commerce on their tax bases.
One of the bills, sponsored by Rep. Spencer Bachus (R-Ala.), would set
up a sales tax compact involving at least 20 states. The states in the compact
would agree to simplify and harmonize their tax codes in exchange for the
right to collect the use tax on purchases by residents of their states from
In the past, the Supreme Court has ruled that the thousands of local
tax jurisdictions across all the states would impose too great a burden
on out of-state retailers who would have to comply with their varied codes.
But in its most recent ruling, the court said that if Congress found a way
to simplify the tax system, merchants could be compelled to collect the
Congress has wrestled with the issue before, but as e-commerce grows,
state and local officials are putting enormous pressure on lawmakers to
act, said Karl Frieden, a partner at Arthur Andersen, in Chicago, and author
of "Cyber Taxation: The Taxation of E-Commerce."
The Bachus bill appeals to states because, although it would not require
a single tax rate in jurisdictions within a state, it would authorize states
themselves to set a single rate, Frieden said. The compact would be designed
to provide a framework for a more unified and simple sales and use tax system
without intruding on states' rights to set and regulate the sales tax locally.
But Bachus' bill and the others face strong opposition from members
of Congress who oppose any tax law changes that might jeopardize the growth
of e-commerce, said Frieden, who believes that none of the bills debated
at the hearing are likely to pass this year.
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