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States argue for taxing Internet transactions

John McCain
McCain: "The 'Main Street' retailers ... see customers come to the store to locate items ... only to leave and order the items over the Internet just to escape the sales tax."  

WASHINGTON (CNN) -- The ability of local governments to collect sales and use taxes from Internet transactions was argued strenuously during a lengthy Senate hearing Wednesday, as time runs out on the existing federal moratorium on Internet taxation.

The Senate Commerce Committee, chaired by Sen. John McCain, R-Arizona, heard opposing views Wednesday on the prospect of states and localities eventually being able to collect taxes on sales transactions conducted over the Internet.

The existing moratorium on Internet taxation, implemented as part of the 1999 Internet Tax Freedom Act, expires in October. The House and Senate must consider whether to reauthorize the moratorium or open up the burgeoning world of electronic commerce to local taxation, yielding perhaps millions of dollars in revenues to states and local governments.

McCain, opening the hearing, said he would prefer to see the moratorium continued.

"I believe that Congress will and must act before then to renew its objections to multiple and discriminatory taxes on the Internet, as well as to taxes that inhibit Internet access," McCain said, citing the cloud of financial uncertainty now perched over the once-booming technology sector.

McCain said, however, that he has been inundated by requests from local government officials to help devise a system that will allow states and localities to collect sales taxes from remote transactions.

Sales taxes must be collected, some have argued, because some states do not levy income taxes on their residents -- meaning sales taxes are a principal source of income.

The standing block on Internet taxation, many argue, is denying states funds for the provision of vital services such as education and health care. The shifting dynamic in commerce is leading many consumers to stay home and order their goods with the personal computers, they say, rather than patronize local businesses, upon whom local governments depend for tax collection.

A question of fairness

Many owners of small establishments have also protested the tax-pass given to establishments that conduct their business over the Web, saying if the trend is allowed to continue, they may be driven out of business.

"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," McCain said.

This is a problem that needs to be negotiated, McCain suggested, adding that the states should come up with a regime that solves it.

"All interested parties must be willing to make significant sacrifices," McCain said. "The states and localities in particular must be able to make some tough decisions now to advance true sales tax simplification, before Congress will consider subjecting remote sellers to the reach of more than 7,000 taxing jurisdictions in the United States.

"I do not think that is too much to ask," he said.

Wyoming Gov. Jim Gerringer, a Republican, speaking in part as an emissary from the National Governors' Association, asked the committee for cooperation and partnership, saying -- as an example -- that a state such as his own suffers immeasurably from the loss of potential revenue.

"This is not about whether Congress should allow, but Congress should enable collection of such taxes, and the answer is, 'Yes,'" Gerringer said.

"The question is what happens to state revenue sources that depend on sales taxes as they shift from [conventional to electronic commerce]," he said. "How much will be shifted away from education, from health care? How much will be shifted away from providing these vital services?"

Much of the early portion of the hearing was devoted to a back-and-forth exchange between committee members and witnesses over what exactly was being discussed.

Considering the consequences

While most of the people in the room agreed that access to the Internet should not be taxed -- the original intent of the Internet Tax Freedom Act -- some witnesses could not agree on the consequences of Internet sales taxation.

Massachusetts Lt. Gov. Jane Swift, a Republican, beseeched McCain and the committee to refrain from allowing the imposition of any form of tax on electronic transactions.

"I am deeply concerned that a tax on the Internet will hinder growth in an important sector at a time when it can least afford it," Swift said. "It would be a grave mistake on our part to start taxing Internet commerce before it has a chance to establish itself."

Swift compared Gerringer's call for some sort of uniform tax to the prospect of a Massachusetts resident buying an item in a Jackson Hole, Wyoming, store, and placing the onus of collecting Massachusetts state taxes on the Wyoming proprietor.

Gerringer took exception, saying business were migrating much of their sales efforts to the Web to avoid paying any kind of tax, and that is why a tax regime upon which the states and Congress can agree must be worked out.

"It's like coming here to Washington and not paying tax for your hotel room because you paid for it over the Web," he said.

Republican Sen. Kay Bailey Hutchison agreed with Gerringer's assessment, saying 40 percent of Texas' state revenue comes from sales taxes.

"We want a fair and level playing field for our 'Main St.' businesses," she said.

Congress will have to further define the issue before the moratorium expires this fall.

Sen. Ron Wyden, D-Oregon, has introduced a bill that would extend the tax moratorium through 2006, while "encouraging" states to simplify their sales and use taxes.

Another bill, introduced by Sen. Byron Dorgan, D-North Dakota, would also extend the moratorium, while calling for equal taxation for transactions conducted over the Internet, the telephone, or through the mail.

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4:30pm ET, 4/16

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