Congress heads for internet tax showdown, as Senate ties controversial sales levy to ISP tax

Photo by Gunnar Pippel/Shutterstock

A new Senate bill may force lawmakers this week to make a tough choice on internet taxes: they must agree to expand the reach of sales taxes on out-of-state retailers, or else see the end of a law that forbids states and cities from imposing a tax on internet access.

As the Wall Street Journal reported on Friday, the dilemma stems from Senate Majority Leader Harry Reid’s handling of a bill called the Internet Tax Freedom Act. That bill, which passed the House by a large margin, would permanently entrench a temporary moratorium on ISP taxes. The measure is politically popular because it means consumers won’t see “service fees,” akin to those that appear on cell phone statements, on their broadband bills.

Instead of putting the same bill to the Senate, however, Reid has decided to attach it to a proposed law called the Marketplace Fairness Act. That bill, which first passed the Senate last year, would require online retailers to collect tax on sales they make to out-of-state consumers.

The internet sales tax measure has strong support from main street retailers, who argue it is unfair that some online merchants can charge less since they don’t have to collect sales tax. Under current law, retailers have to collect tax only where they have a physical presence.

Critics, however, argue that the Marketplace Fairness Act, first introduced by Sen. Mike Enzi (R-Wy) would impose a burden on internet businesses by forcing them to collect taxes for hundreds of state, county and tribal governments. Elected officials from Oregon and New Hampshire, meanwhile, dislike the bill because there states have no sales tax in the first place.

The situation could come to a head this week if, as expected, Reid brings the bill to the floor of the Senate for a vote. Here is how the Journal’s editorial board (which is vehemently anti-Harry Reid) sums up the situation:

So Mr. Reid will now try to jam last year’s rough draft into law, or else force consumers to accept new taxes on Internet access bills starting Nov. 1, and he’ll have some help from Republicans like Mr. Enzi and Tennessee’s Lamar Alexander.

Minority Leader Mitch McConnell should use every parliamentary tool at his disposal to stop this legislative extortion.

If Senators vote against the bill, there is a good chance the tax moratorium on internet access will expire when a sunset clause goes into effect in November — meaning that state and local governments could begin passing broadband levies.

The outcome is likely to be decided this week or next, before Congress leaves for August recess ahead of November’s mid-term elections.

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