States Want Slice Of E-Pie

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Sales tax revenue lost to transactions over the Internet could force many states to cut government spending or raise other taxes to compensate, the Congressional Budget Office said Wednesday.

The losses, put as high as $20 billion by 2003 in some estimates, will continue unless states are allowed to set up a way to collect the taxes consumers already owe for online, catalog or telephone purchases, G. Thomas Woodward of the CBO told the Senate Finance Committee.

"The growth of those purchases and the difficulty of enforcing compliance combine to erode their (state) sales tax bases," said Woodward, tax analysis assistant director at the CBO.

Congress is considering whether to let the District of Columbia and the 45 states with a sales tax begin putting into place a system for collecting taxes on remote sales.

The Supreme Court has ruled that a business must have a physical presence in a state before that state can require sales taxes to be collected. Consumers still owe the tax on remote purchases, but few ever pay.

Some lawmakers want to give states enhanced collection ability, while others want to extend a freeze that bars only Internet access taxes and taxes that single out the Internet. A major concern is whether 7,500 state and local taxing jurisdictions can simplify their systems enough to avoid imposing a costly new burden on business.

"I would like to be certain that if we address the need of the states, we don't crush our small businesses at the same time," said Finance Committee Chairman Max Baucus, D-Mont. "There must be a balance."

Despite months of negotiations among senators from both parties, there is no deal on the sales tax issue. One sticking point is what requirements Congress would require states to meet before lawmakers would vote on a new collection system.

In the House, Republican leaders want to make sure extension of the moratorium, which expires on Oct. 21, does not become entangled in the debate over sales taxes. A House Judiciary subcommittee planned to vote Thursday on one bill that would extend the moratorium for five years, and a second measure that would make the freeze permanent.

"Our leadership has made it clear they don't want anything to prevent a moratorium bill from reaching the president's desk," said Rep. Bob Barr, R-Ga., chairman of the Judiciary subcommittee on commercial and administrative law. "There's nothing that says we can't continue to work on these other issues."

Many traditional retailers, including large chains such as Wal-Mart, agree with governors and state officials that the expiring moratorium provides a perfect moment for Congress to settle the sales tax debate. Other business groups want lawmakers to ensure that giving states greater sales tax collection power does not open the door to other taxes, such as income taxes.

"Allowing state and local governments to unleash economic anarchy in the current environment could have long-term, devstating effects on the economy, business and employment," said Frank Julian, vice president and tax counsel for Federated Department Stores and a top official with the Direct Marketing Association.

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