Description

Executive Summary

A heated debate is once again under way in

Congress over the tax treatment of electronic commerce

and the Internet Tax Freedom Act of 1997. The ITFA imposed a moratorium on state and

local taxes on Internet access and banned "multiple

or discriminatory" taxes on electronic commerce.

That moratorium was intended to last only

three years but was extended by Congress in 2001

for another two years. It will lapse on November 1,

2003.

The ITFA has been a remarkably misunderstood

or misinterpreted statute and has very little to do

with what really lies at the heart of this debate--the

effort by state and local governments to collect sales

and use taxes on remote vendors in interstate commerce

(mail order, catalog, and e-commerce companies).

Contrary to press reports and statements

made by some members of Congress, the ITFA

moratorium does not directly affect the ability of

states and localities to impose sales and use taxes on

purchases made over the Internet.

What state and local officials are really at war

with is not the ITFA but 30 years of Supreme

Court jurisprudence that has not come down in

their favor. Their ultimate goal is to overturn

those precedents, which held that states could

require only firms with a physical presence--or

"nexus"--in their jurisdictions to collect taxes on

their behalf. State and local tax officials have

worked to eliminate or water down these restrictions

on their tax reach but thus far have not

been able to get around them or convince

Congress to authorize the imposition of collection

obligations on interstate vendors.

Although extending the existing ITFA moratorium

and continuing to uphold the Supreme

Court's nexus jurisprudence makes good sense,

Congress must also take an affirmative stand

against efforts by state and local governments to

create a collusive multistate tax compact to tax

interstate sales. Other options exist that state

and local governments can pursue before looking

to impose unconstitutional tax burdens on

interstate commerce. Of course, getting runaway

state spending under control would go a long

way toward solving many of their supposed

problems. Merely extending sales tax collection

responsibilities to electronic commerce--which

constitutes less than 2 percent of all retail activity

in the United States--will not solve the fiscal

crisis that state and local governments have created

through their profligate spending habits.