The standalone expansions are pretty rare, definitely more expensive than picking up a GOTY copy from either a retail store somewhere or from steam.
There are two issues with mods on Steam: If you use the Morrowind Graphics Extender mod, it won't work with the steam overlay window. The whole screen gets messed up when that overlay is active. But you can choose to disable the steam overlay for Morrowind specifically and then all is fine, not a problem. There are also some files that need to be redated in order for other graphics mods (texture replacers) to work, but nowadays the http://morrowind.nexusmods.com/downloads/file.php?id=19510 can easily do that for you.
Other than that, there are no issues or difficulties with modding the Steam version. Except maybe that the directory is somewhat hard to find if you're not used to Steam (it's under steam/steamapps/common/Morrowind) but that's what shortcuts are for.
So Steam's a good option, especially with the current discount.