Internet sales tax looms


Online shoppers in more than 20 states may soon pay sales taxes on their purchases if Congress passes pending legislation.

Under the proposed Streamlined Sales and Use Tax Act, out-of-state merchants and online vendors must collect sales tax on goods shipped to some states. The key issue is whether buyers live in a state that has adopted the interstate sales and use tax program called the Streamlined Sales and Use Tax Agreement.

Currently, 45 states and the District of Columbia impose sales and use taxes on purchases. Of these, 35 states have signed onto the interstate tax program, which streamlines more than 7500 diverse sales tax laws in state and local jurisdictions. In 20 of these 35 states, the state legislatures have ratified the program and are ready to start taxing Internet purchases.

This measure would not be affected by a ban on taxes unique to the Internet, also being considered by Congress. That’s because the taxes involved are not new fees, the bill’s supporters say–they’re just not being collected now.

“The bill only enforces the collection of taxes that are already due,” says Bill Duncan, a legislative aide to Rep. Ernest Istook Jr. (R-Oklahoma), a House sponsor.

Temporary Respite

The program is now voluntary, however, so not all merchants collect the taxes. Some, like Wal-Mart Stores Inc. and Target Corp., already collect sales taxes for online purchases in the 20 interstate tax program states, according to Duncan.

Enactment of the House bill would force merchants that ship goods into the 20 participating states to collect taxes on purchases.

The ten states that have not signed on are moving cautiously toward adoption, while continuing to study and analyze the issue. California, which has a complicated sales and use tax system, is participating more actively in the initiative after sitting on the sideline for months.

“To have us show up (at the meetings), participate, and engage is a big deal,” says Carole Migden, chair of California’s Board of Equalization, which administers the state’s tax programs. Still, she says, “big revenue-generating states such as California and New York conceptually like the initiative, but aren’t ready to jump in.”

No one knows whether any of the ten holdout states will ratify the interstate taxing system. David Steil, representing the National Conference of State Legislatures, the lobbying arm of state legislative bodies, says he doesn’t expect all of them to adopt the interstate system.

“I suspect some won’t come on board,” he says. “If they do nothing, they’ll lose sales revenue.”

Congressional aide Duncan adds, “There are political forces in every state that drive the train. Just because the tax commissioner recommends the Agreement, does not mean the legislature will follow suit.”

Who’ll Pay

The pending bill gives states the clout to collect sales and use taxes from out-of-state merchants who have no stores, warehouses, or other physical facilities in the state where the sale occurs. In 1992, the U.S. Supreme Court ruled that states can’t force out-of-state vendors to collect sales taxes for them, largely because the various sales and use tax systems are so complex. The court declared that it’s too hard for retailers to keep track of all those tax systems.

For example, a Twinkie might be defined as nontaxable food in one state, but as taxable candy in another. Often, sales tax regulations differ even among counties or cities within a state.

Because the proposed Streamlined Sales and Use Tax Act streamlines procedure, it reduces the burden on retailers, which can then be forced to charge taxes, say those familiar with the bill.

“This bill provides a uniform definition of what is taxable,” Duncan says.

To protect small businesses, the bill exempts merchants with annual sales less than US$5 million from collecting sales and use taxes from their customers. “This would be an excessive burden on small retailers,” says Craig Shearman, a spokesperson for the National Retail Federation.

Online mass retailer Inc. opposes the bill, contending that it gives smaller online retailers an unfair advantage.

“The bill creates a large loophole for small sellers,” says Bill Curry, an spokesperson. “Clearly, anyone with $4,999,999.99 worth of out-of-state sales each year is not small,” he adds. “It’s a threshold that invites abuse.”

Next Steps

The bill, introduced in the House last Thursday, will be presented to the Senate later this week. Support is strong, says Duncan, noting that a similar measure was passed by the House in 2000 as part of the Internet Tax Moratorium, but did not come to a vote in the Senate.

Congress could vote on the bill by the end of this year or in early 2004, Duncan says.

The bill’s supporters include state and local governments, which have experienced revenue shortfalls in recent years. Those jurisdictions are estimated to have lost as much as $13 billion in uncollected sales taxes from online sales in 2002, according to a study by the Business Research Center at the University of Tennessee.

Other endorsements come from retail trade groups such as the International Council of Shopping Centers and the National Retail Federation, which have long complained that online competitors enjoy a competitive advantage because they need not charge sales taxes. The bill levels the playing field for retailers, the brick-and-mortar trade groups say–and not just small, independent storefront merchants will benefit.

For example, Gateway Inc. supports the bill because it creates more equitable competition with key rival Dell Inc. Dell does not collect taxes from its online customers. But Gateway, with stores in most states, must charge sales taxes when shipping to states that impose sales taxes.

A University of California-Los Angeles study released earlier this year found that nearly half of online buyers said they would buy fewer goods online if sales taxes were applied to their purchases.