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E-Taxes: Inertia May Get Us Somewhere

By Howard Gleckman The Internet Tax Moratorium expired on Sunday night, Oct. 21. Did you notice? Probably not. And you're probably not going to notice for at least a year, or maybe longer.

The end of the congressional freeze on new taxes on Internet access will have no immediate impact on online commerce. If you paid tax on your monthly Internet Service Provider fee before Oct. 21, you will continue to pay it today. And if you didn't pay tax on your ISP account last week -- and most of us didn't -- you won't do so now. Fact is, only a dozen state legislatures are even in session this time of year, and none of them are planning on jamming through an online access tax.

The important dispute is over sales taxes, not levies on twenty-dollar-a-month access fees. And it is important to remember that the moratorium never impacted the ability of states to collect those taxes on online purchases. That was limited not by the congressional freeze, but by a 1992 Supreme Court decision.

NEW RULES. While the end of the moratorium won't matter to consumers in the short run, it has enormous political consequences for the debate over whether states can require out-of-state e-sellers and mail-order companies to collect sales taxes for them. The fact that the freeze was allowed to expire gives governors and other supporters of e-taxes new leverage going forward to levy fees on online commerce.

In Washington, inertia is everything. It is always much harder to pass a law stopping something than it is to merely continue the status quo. As of Sunday, Oct. 21, the status quo is that there is no federal prohibition against taxing Internet access. Congress is no longer debating whether to extend a moratorium. It is debating whether to impose a new one. And that makes a world of difference.

For now, policy-makers are divided into three camps: those who want to resume the freeze for as long as possible, those who favor a short ban, and those who won't back any curbs unless they are accompanied by a resolution to the sales-tax dispute.

THREE SCHOOLS OF THOUGHT. The first group, including the Bush Administration and lawmakers such as Rep. Chris Cox (R-Cal.) and Sen. George Allen (R-Va.), wanted to extend the freeze for five years and defer the sales tax issue at least that long. But even the GOP-controlled House was unwilling to go that far. And last week it approved a modest two-year continuation.

Two years isn't flying in the Senate, however. A small group, led by Sen. John McCain (R-Ariz.), backs a 24-month reprieve. But they have been blocked by senators Byron Dorgan (D-N.D.) and Mike Enzi (R-Wyo.), who are insisting that Congress grant states the ability to require out-of-state sellers, such as mail-order and online retailers, to collect sales taxes. They would allow such collections once states agree to drastically simplify their own tax regimes, thus satisfying the objection raised by the Supreme Court a decade ago.

Enzi and Dorgan are playing the high cards. In the Senate, it is easy for two senators to block legislation. And they are now in a position to demand their sales-tax simplification provision as the price for resuming the freeze on Internet access taxes.

ENTER THE GOVERNORS. How will this end up? There is still a chance that Congress will agree to a modest resumption of the ISP tax freeze -- perhaps a year or so. But a moratorium longer than that will now almost certainly give states the opportunity to collect taxes on e-sales as long as they agree to simplify the levies. If the techies resist that trade-off, it is possible that Congress will simply go home without resolving either the access tax or the sales tax issue.

Either outcome will move the ball onto the court of governors and state legislatures. It will be up to them to decide whether they want to simplify and, thus, try to collect taxes on online purchases. With the economy slow and revenues short, they'll be under a lot of local pressure to enact e-taxes. But it will be their choice. And, in my opinion, that is exactly how it should be. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington

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