What makes matters worse is that both the mainstream and trade press often lump together two different bills -- one that seeks to extend a moratorium on taxing Internet access and a second that aims to require some e-commerce business to levy a bevy of state sales taxes. To help sort out the potential taxes and their implications, here's a breakdown of the two bills and how each could potentially affect your e-commerce business.

Tax on Internet Access
The tax news making the headlines this week is over the Internet Tax Moratorium, which is set to expire tomorrow. With its deadline looming, the U.S. Senate still has not scheduled a vote on a bill to make it permanent. The bill, also know as S. 150 Internet Tax Nondiscrimination Act, is sponsored by Sens. Ron Wyden (D-OR), and George Allen (R-VA).

If passed by the Senate, it will permanently prohibit taxes on a consumer's ability to access the Internet and multiple and discriminatory taxes on electronic commerce, a moratorium imposed by the Internet Tax Freedom Act (ITFA). Essentially, the impact of this bill passing would be that state and local governments would lose their ability to tax telecommunications services that were purchased by Internet access providers (which use high speed lines to link to the Internet backbone).

On Sept. 17, 2003, The U.S. House of Representatives passed its own version of the bill (H.R. 49 Internet Tax Nondiscrimination Act) to make the current moratorium permanent. The original moratorium was established by the ITFA, enacted for three years in 1998 and renewed by Congress for another two years in 2001.

The primary concern of proponents of S. 150 is that any tax on Internet access would stifle the growth of households connecting to the Internet while simultaneously impeding e-commerce's growth. In other words, failure to pass the S. 150 would leave DSL service and other high-speed access technologies open to taxation. And according to Sen. Allen, in many states and localities, taxes on Internet access can climb as high as 25 percent, thereby increasing the cost of a high-speed DSL line as much as $10 to $15 per month, or roughly $120 to $165 per year just to have Internet access in a family's home. Such taxes could possibly raise the cost of Internet access and discourage the many Americans who are on tight budgets from surfing, and shopping online.

However, the current Internet tax moratorium does not apply to sales taxes on Web transactions. If the moratorium, permanent or otherwise, is ultimately passed by Congress, it would most likely not apply to the growing movement to enforce sales taxes on Internet sales.

S. 150 is currently in the Senate Finance Committee.

Tax On E-commerce Sales
Separate legislation, introduced in the House and Senate earlier this year, would authorize states that adopt streamlined sales tax simplification provisions to mandate collection of sales taxes on purchases by its residents from Internet and catalog retailers.

Reps. Ernest Istook (R-OK) and William Delahunt (D-MA) sponsored the House bill (H.R. 3184), along with a bipartisan group of other members. Senators Mike Enzi (R-WY) and Byron Dorgan (D-ND) sponsored a similar Senate bill.

H.R. 3184, also known as the Simplified Sales and Use Tax Act, would allow states to enforce sales taxes on online sales, provided the states agree to remove a lot of the exemptions, inconsistent definitions and tangled rates that now make compliance difficult, especially for small businesses that sell into many states

However, small businesses can take heart. If passed, the legislation would not apply to those merchants with less than $5 million in remote sales. The legislation also requires states to compensate retailers for their costs in collecting sales taxes location.

In 1992, the U.S. Supreme Court ruled that the patchwork of taxing jurisdictions across the country is too complex and burdensome for remote retailers to charge and collect sales taxes. The court also said states could require only sellers that have a physical presence or "nexus" in the same state as the consumer to collect so-called use taxes. In order for taxes to be collected on online sales, states would need to first simplify the existing system.

If H.R. 3184 wins congressional approval, participating states could require merchants that ship goods into their states and have more than $5 million in gross annual sales to collect sales taxes. Currently, 34 states have agreed to enter into the compact, and 20 states have already passed implementing legislation.

H.R. 3184 is currently in the House Judiciary Committee.

E-Commerce-Guide will continue to monitor the situation and its implications. Meanwhile, we welcome you to share your thoughts and concerns on Internet sales tax and how it will affect your business in our online discussion forums.