WASHINGTON — State and local governments may have lost a costly battle against federal preemption and any leverage they had over getting online sales tax legislation passed when Congress last week approved a permanent moratorium on state and local governments taxing Internet access.
Senate leaders slipped the permanent moratorium (the Internet Tax Freedom Act) into a trade bill (the Trade Facilitation and Trade Enforcement Act] they approved by a vote of 75 to 20 that President Obama had promised to sign. The moratorium will prevent state and local governments from taxing telecommunications and cable providers, as well as those who access the Internet.
The action was supposed to be part of a deal, under which Senate Majority Leader Mitch McConnell, R-Ky., agreed to bring a pending online sales tax bill (the Marketplace Fairness Act) of similar legislation up for a vote later this year. The MFA would allow states to require out-of-state online retailers to collect sales taxes.
But as the Government Finance Officers Association told members in a post on its website: There's "no guarantee" that the MFA of a similar bill in the House will move forward.
GFOA said the moratorium would "compromise local governments' ability to deliver essential services to their communities."
Frank Shafroth, director of the Center for State and Local Leadership at George Mason University, said, "By permanently prohibiting state and local governments from collecting certain types of taxes, the bill would, according to the Congressional Budget Office, impose an intergovernmental mandate as defined in the Unfunded Mandates Reform Act (UMRA)."
He added that, "CBO has estimated that the direct costs to states and local governments would probably total more than several hundred million dollars annually—with some estimates rising to $1 billion."
"There are two especially pernicious aspects in the Congressional action," Shafroth said. "First, in violating its own unfunded mandates law, Congress made no provision to offset the revenue losses it imposed—and imposed permanently; second, the action imposed a significantly greater hurdle to the key leadership efforts of Sen. Mike Enzi, R-Wy., and bipartisan Senate leaders to level the playing field between on-line versus brick and mortar vendors."
Enzi is a key sponsor of the MFA.
The moratorium on taxing Internet access was created by the Internet Tax Freedom Act, which was enacted in 1998 and extended numerous times since then until now.
GFOA, the National Conference of State Legislatures and other groups had repeatedly urged Congress not to extend the moratorium or make it permanent, arguing it would constitute a federal infringement on state budget sovereignty and cost states hundreds of millions of dollars.
The NCSL had urged the lawmakers, at a minimum, to postpone a vote on the moratorium until they passed the MFA and a similar bill pending in the House.
"It is now more important than ever for state and local governments to help members of Congress understand the considerable importance of passing [the] MFA," GFOA said in its post.
The bill is important for state and local governments, which have increasingly been losing sales tax revenues from transactions done over the Internet. Internet sales have generally escaped such taxation, even though taxes are due under most states' "use tax" requirements, because consumers just don't pay the taxes.
Generally, states have been blocked from requiring Internet retailers to collect sales taxes by a 1992 Supreme Court ruling in Quill v. North Dakota. In that case, the high court said states could not impose a tax on an office supply retailer because the retailer did not have any physical presence in the state. The court was concerned there were thousands of separate sales tax jurisdictions that could severely restrict interstate commerce if they adopted varying sales tax requirements. It said Congress was responsible for granting authority in this area.
The MFA is aimed at leveling the playing field for Main Street brick and mortar businesses that are currently at a disadvantage because they must collect sales and use taxes while a growing number of businesses selling over the Internet don't.
A similar bill sponsored by Rep. Jason Chaffetz, R-Utah, is pending in the House. But House Judiciary Committee chairman Rep. Bob Goodlatte, R-Va., opposes that bill and has sponsored his own legislation, which state and local groups oppose.
