Local governments soon may have a new weapon in the fight against budgetary woes: sales taxes from Internet transactions. Federal legislators recently introduced bills that would allow states to require remote, or out-of-state, retailers to remit state and local sales and use taxes for online, catalog and over-the-phone purchases. State, city and county officials say they need the money to mitigate ongoing economic problems and maintain essential services.

In the House, representatives Ernest Istook, R-Okla., and Bill Delahunt, D-Mass., introduced the Streamlined Sales and Use Tax Act in September (H.R. 3184). If passed, the legislation will grant congressional approval to a compact of states that have simplified and standardized their diverse sales tax laws and those of their local governments. States that are currently part of the voluntary compact and those that join in the future could then require merchants to remit taxes on remote sales to state and local governments. A Senate version of the bill (S. 1736) has been introduced.

The bills would exempt businesses with less than $5 million in annual taxable remote sales. They also would reimburse retailers for the cost of collecting the taxes.

The legislation is necessary because of a 1992 U.S. Supreme Court decision in which the court ruled that states cannot require a seller to remit sales and use taxes unless the seller has a physical presence in the state. The court's reasoning was that “it was an undue burden on remote sellers to require them to collect these sales taxes because there were so many taxing jurisdictions,” explains Larry Naake, executive director of the Washington, D.C.-based National Association of Counties (NACo). “It was a huge burden to identify what the tax rates were in all of these jurisdictions all over the country.” Only Congress, the court added, could compel such retailers to collect the taxes. Many states currently try to recover the funds by requiring buyers to remit the taxes on remote purchases themselves, but compliance, predictably, is rare.

Citing research from the University of Tennessee, Naake says that states, cities and counties will lose an estimated $26 billion in sales and use tax revenue this year because remote sellers are not required to remit those funds. By 2011, he adds, the figure could rise to $55 billion.

In March 2000, a coalition of states formed the Streamlined Sales Tax Project and began laying the groundwork for the current federal bills. With input from local governments and private businesses, the coalition worked to simplify state and local tax laws. Last November, the project ratified a model agreement that establishes uniform definitions within tax laws and simplifies rates so that an individual state or local government cannot tax different products at different rates. So far, 20 states have passed conforming legislation.

While the bills enjoy bipartisan support and the fervent advocacy of public interest groups like the Washington, D.C.-based National League of Cities and NACo, which has made the bills its top legislative priority, their fate remains uncertain. As of late October, the House Judiciary Committee's informational hearing on H.R. 3184 marked the only action on the legislation. Lawmakers are hoping to adjourn for the year this month, and the race to pass the 2004 federal spending bills, energy-reform legislation and a prescription drug plan for seniors may leave little time for other issues.

Even if the legislation does not pass this year, Congress can still consider it next year. But, as Naake notes, next year is an election year, which may make Congress more hesitant to deal with a tax bill.