Washington's e-Tax Muddle

Lawmakers are taking yet another shot at formulating a coherent policy. If past experience is any guide, don't count on a quick resolution

By Howard Gleckman

The latest episode of the Internet tax version of Perils of Pauline could be played out by Aug. 3, when the workweek ends. With Congress about to leave town on a month-long break, and with the Internet tax moratorium due to expire just six weeks after the lawmakers return, pols are yet again attempting to get something done on the contentious issue.

If they fail this week, odds will sharply increase that Congress will extend the freeze on Internet-access taxes, but most likely for only a year or less. Such a step would be less of a victory for the high-tech industry than a reflection of Congress' inability to tackle the issue this year.

Lawmakers are not giving up quite yet. For the third time since May, Congress looks like it may be on the verge of actually doing something on e-taxes. In the first two episodes, key Senators marched to the brink of a bipartisan deals before the proposed solutions fell apart in legislative disarray.


  This time, both the House and Senate are trying to take steps to settle the issue. But, as if anyone needed more clues as to how nasty the e-tax debate is, the two chambers seem to be moving in opposite directions.

The House Judiciary Committee -- if it actually meets this week -- is likely to vote to extend the current freeze on Internet-access taxes for another five years. Continuing that ban also would have the more far-reaching result of effectively blocking states from requiring e-tailers to collect sales taxes for purchases made online. The Supreme Court has ruled that, without congressional approval, a state cannot impose such an obligation on out-of-state businesses.

Across Capitol Hill, pressure is growing to clear the way for such tax collection. There, key members of the Senate Commerce Committee, including Chairman Fritz Hollings (D-S.C.), top Republican John McCain (Ariz.), and Senator Byron Dorgan (D-N.D.) are still trying to ready a bill that would pave the way for states to require both online and mail-order businesses to collect sales taxes.


  Their measure would allow states to impose such a requirement on retailers once 20 or 25 states agree to dramatically simplify their sales-tax regimes. If they can finally nail down their deal, there is a slim chance that the Senate Commerce Committee could approve the measure this week.

Can they pull off an agreement this time after failing so often in the past? Perhaps. One reason may be that they could be preparing to cut loose Senator Ron Wyden (D-Ore.), who has been a key backer of the tech industry in the ongoing talks.

Until now, protax strategists have been willing to compromise on some key elements of a deal in order to get Wyden's support. For instance, they were willing to swallow the requirement that each state permit only a single sales-tax rate within its borders. But sources say McCain, Hollings, and Dorgan are losing patience with Wyden and may now try to push a bill without him. Wyden still hopes to work out an agreement, an aide says.


  Of course, even if the Senate Commerce and House Judiciary panels can complete their work on e-taxes, Congress has a lot more work to do before the moratorium ends on Oct. 20. Other committees, including the powerful Senate Finance Committee, must still be heard from. The bills will have to go to the House and Senate floors. And, toughest of all, some agreement will have to be reached between the two chambers.

All that will be hard to do in such a short time. If Congress can't at least get started by the end of this week, it could prove impossible. If that's the case, don't be surprised to see a mini-extension of the Internet tax moratorium and a replay of the whole debate yet again in 2002.

Gleckman covers the political and economic scene from his perch in BusinessWeek's Washington bureau, and he pens BW Online's Washington Watch column

Edited by Beth Belton

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