Days numbered for tax-free Net sales

Governors and state legislatures push for online sales taxes, and Democratic control of Congress could help them.

The halcyon days of tax-free Internet shopping may be about to end.

A powerful alliance of politicians, including key U.S. senators and the National Governors Association, is arguing that out-of-state retailers must be required to charge sales taxes on purchases. At the moment, for instance, companies like Seattle-based are not required to collect sales taxes on shipments to millions of its customers in California.

This is hardly a new debate: officials from the governors' association have been pressing Congress to enact such a law for at least six years. They invoke arguments, which have been unsuccessful so far, like saying that reduced sales tax revenue threatens budgets for schools and police.

What has changed, however, is the political dynamic. While its precise contours are difficult to map, a Democrat-controlled Congress is seen as more likely to agree to the idea than one controlled by Republicans.

"When you have a Democratic majority in Congress, that Congress will be more friendly to imposing new burdens on business if it means additional tax collection," said Steve DelBianco, executive director of the NetChoice coalition, which counts as members eBay, Yahoo and the Electronic Retailing Association and opposes the sales tax plan.

Another factor that could tip the scales in Washington in favor of the pro-sales tax forces is a concept called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of the notorious convolutions of state tax laws. If that happens, they believe, it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers.

"Without any doubt, Congress will eventually approve legislation to give states that comply with the (agreement) mandatory collection authority for out-of-state transactions," said Neal Osten, federal affairs counsel for the National Conference of State Legislatures. "We expect that the legislation will be introduced shortly in this Congress."

So far, 22 states have signed onto the project by enacting legislation to simplify their tax codes, Osten said. "We believe that with the system operational, with software and online collection available, sellers volunteering and revenues being collected, Congress will consider the legislation and indeed approve it," he added in an e-mail message.

Sticky debate over "candy" definition
A simplification effort is key because of the dizzying complexity of state tax laws. One example is the Streamlined Sales Tax Project's "

Flour as an ingredient became a sticky point. In 2003, a representative of Indiana, James Turner, noted that a proposed definition of candy would have taxed the Milky Way Midnight candy bar but not the original Milky Way bar. But further investigation showed that Turner's counter-proposal would have treated "certain flavors of Pop Tarts" and Cookies and Twix Crunchy Cookie Bars as candy--but not Cookies and Snickers Crunchy Cookie Bars. Peanut butter Girl Scout cookies would be candy, but Thin Mints or Caramel deLites would be classified as food.

Bizarre distinctions like this, coupled with the existence of more than 7,000 different tax agencies, explain why the U.S. Supreme Court ruled, in a 1992 case called Quill v. North Dakota, that out-of-state retailers generally couldn't be obligated to collect sales taxes unless Congress changes the law. The justices noted: "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes."

One exception to that is a legal concept called "nexus," which means a company can be forced to collect sales taxes if it has a sufficient business presence. A second exception is cigarette sales, which are covered by the Jenkins Act.

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