In the past two years, however, there has been a flurry of activity in Congress as members seek to strengthen or weaken state taxing authority. Three legislative proposals still sit before Congress, all of which have the potential to dramatically affect the ability of states to collect taxes.
THE GOOD
The most important legislation has to do with implementing the streamlined sales tax system. Two bills, both called the "Streamlined Sales and Use Tax Act," are intended to authorize the multistate sales tax collection compact envisioned under the Streamlined Sales and Use Tax Agreement, model legislation approved by 21 states in 2003 and 2004.The passage of these bills would finally address the serious problem remote sales presents to the sales tax. Under current law, states cannot force vendors to collect sales and use taxes (which they then remit to the state) unless the vendor has a physical presence in the state. In the age of mail order, telemarketing and e-commerce, state governments lose billions of dollars in tax revenue. The streamlined sales tax legislation would allow the states to force out-of-state vendors to collect the tax on goods sold into their state. These are not new assessments. These are taxes that are already due; they just cannot be collected.
A broad coalition of business and state and local government groups have worked long and hard on developing a process that will make collection of taxes on remote sales as painless for the vendor as possible. Nearly half the states have done their part and enacted the model legislation. It is time for Congress to do its part.
THE NOT SO GOOD
Congress is also considering another prohibition on taxation of Internet access. The original Internet Tax Freedom Act expired in 2003, so now both houses have passed new limitations, and the only hang-up appears to be the length of the prohibition. The Senate has passed a four-year moratorium, and the House wants a permanent one. Both measures arise out of the belief that prohibiting access taxes will prevent the states from hurting the Internet.Neither the states nor those who believe in state fiscal sovereignty like either measure very much. Nonetheless, there is obvious support for some kind of moratorium, so state and local governments should prefer the Senate version. Besides having a shorter life span, the Senate bill allows states originally taxing Internet access to continue to do so. But the House GOP leadership has said it will not compromise. If the two versions cannot be reconciled, perhaps the issue will go away, and the states will retain some vestige of deciding who and what to tax. At a minimum, Congress should either compromise or throw in the towel and forget about Internet access taxation.
THE UGLY
There is another much more dangerous piece of legislation still pending before Congress. A bill has been introduced in the House that would severely limit the states' ability to impose net income or franchise taxes on interstate commerce. Specifically, the bill would set a physical presence test for all entities. If a business does not have a physical presence in the state (such as plant, equipment, permanent employees), no income or franchise tax could be imposed. If enacted, the bill would cost state governments billions of dollars in revenue.But the revenue exposure is only part of the problem. The bill will decimate the already beleaguered corporate income tax. It will force greater reliance on personal income and sales taxes--and greatly increase the burden on local business. And it will further limit the states' ability to adjust their tax systems to meet the service demands of their citizens.
The House Judiciary Committee held hearings in May. Nothing further has occurred and no similar legislation has been introduced in the Senate. Congress should drop this issue and put an end to this serious threat to state taxing authority.
