Why Tax on Internet Sales Could Be Slower Than a 28K Modem

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With uncollected state sales taxes on Internet purchases running into the billions each year, the Senate thinks it wants to do something.

Just not much. As the Senate Commerce Committee gets ready this week to consider Internet tax legislation as early as Thursday, legislative negotiators are tiptoeing the line between two very interested interest groups — brick-and-mortar retailers and Internet ones — and they're likely to play it safe and leave things pretty much as they are, at least for now.

The easy one: Extend the current moratorium that bars taxes on Internet access and prohibits taxes that single out the Internet. The knottier issue, though, is of sales tax. Say you live in New York and order a book online from Amazon.com (based in Washington state). Technically, you owe New York sales taxes. And states like New York — not to mention the brick-and-mortar stores in them, who complain that Internet outfits are being granted unfairly tax-free status — are looking for permission to start collecting.

One problem is the Supreme Court, which has ruled that a business must have an in-state physical presence — like a warehouse or a retail store — before a state can require sales tax collections on out-of-state purchases. (That's why when a New Yorker buys from Maine-based L.L. Bean, which doesn't have stores in New York, he or she doesn't pay tax. If, however, they bought from J. Crew, which has many stores in New York, they are taxed.) The other is the tech lobby, which lives in mortal fear of the dizzying array of state-level levies across the U.S. and the extra employees and infrastructure e-tailers would need to comply with them.

The legislation that finds its way to the Commerce Committee is expected to try to strike a very tentative balance: Expand states' sales tax collection authority, but only if at least 25 states simplify their own multiple tax rates. A coalition of retailers and mall-owners, including Wal-Mart, is lobbying for sales taxes to apply equally to all sales, and 32 state legislatures have already begun to get together to try to pave the way to a simpler national sales-tax picture. Tech companies, meanwhile, have begun to soften — as long as compliance burdens are reasonable. Says committee chairman John McCain: "I think we're very close to agreement."

But anything that shows up in the Senate this week still has to pass both houses of Congress, and anything that increases tax collection — even a tax-law simplification effort like this one — still smells like new taxes in the Republican-led House.

"I think people would like to keep this thing on the burners," said Rep. Billy Tauzin, R-La., chairman of the House Commerce Committee. "I really don't see us doing much more than extending the current law."