December 28, 2001, 12:00 AM

It may be two years away, but Internet sales tax is still an issue

The Internet sales tax issue just won’t end. Rather than decide the future of taxes on the Internet, Congress and President Bush have delayed making a decision for two years.

The Internet sales tax issue just won’t end. Rather than decide the future of taxes on the ‘Net, Congress and President Bush have delayed making a decision for two years. As 2001 wound down, Bush signed into law a bill that put a 2-year moratorium on Internet access and other discriminatory taxes. That means that instead of deciding on the issue of whether retailers must collect sales tax from online purchases, Congress has put it off for two more years, leaving players on both sides continuing the fight. Although the legislation does not directly address the sales tax issue, many interpret the moratorium as applying to sales tax. The primary goal of the moratorium is to prevent states and localities from levying Internet-specific taxes.

On one side is the National Retail Federation, whose big retail constituents are required to collect sales tax due to their offline presence in various states. “We continue to believe that the sales tax policy should be channel-neutral,” says Sarah Whitaker, senior director of government relations at the NRF. The NRF says, however, it’s better to have the two years to sort out the tax issue among states than to have Congress pass a permanent moratorium.

State governments also want to influence the legislation to ensure they can collect the billions they claim to be losing by not collecting Internet sales taxes. Their efforts entail simplifying the thousands of tax jurisdictions as part of the Streamlined Sales Tax Project. Roughly 16 states have adopted some model of simplified taxation, although opponents claim the effort is still chaotic because states have not made progress in adopting a single model.

On the other side is the Direct Marketing Association, whose smaller, direct-to-consumer merchants oppose collecting sales taxes. “The Internet is still a burgeoning industry,” says Lou Mastria, director of public and international affairs at the DMA. “We’re happy they extended the moratorium though we would have liked to have seen it for four or five years if not permanent.”

Mastria points out that the issue is similar to the one cataloguers have fought with states for years: State governments have been trying to overturn the Supreme Court ruling in a 1992 case that prevented states from collecting sales tax from out-of-state cataloguers. “From a historical perspective, states have tried to get their hands on cataloguers’ money since the 60’s,” he says. “We need to keep on top of this unholy marriage between Internet access tax and Internet sales tax. Congress has agreed with not taxing Internet sales and the big retailers are trying to make it a divisive issue by linking the two. They are not the same issue.”

Although both trade groups say their goal is to level the playing field, it remains to be seen on which field they are actually playing. The rival organizations now are waiting for Congress to give them a chance to step up to bat.

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