Senators propose taxing Internet shopping

Online and mail order purchases aren't always hit with sales taxes today. But Congress may make those taxes mandatory.

This may be the last holiday season to enjoy tax-free Internet shopping, thanks to new legislation in the U.S. Congress.

Two bills introduced Wednesday propose sweeping changes to how Americans are taxed for online and mail order purchases. Businesses initially would be required to collect sales taxes on purchases shipped to roughly half of the country, and that percentage is expected to rapidly increase.

"Main Street retailers collect sales taxes, while many online and catalog retailers are exempt from collecting the same taxes," said a statement published by Sen. Mike Enzi, a Wyoming Republican. "This is costing states and localities billions in lost revenue." (A related bill has been introduced by Sen. Byron Dorgan, a North Dakota Democrat, who is a former state tax commissioner.)

At the moment, if you order something from a company that's located entirely out of state, you're typically not charged sales tax. Seattle-based Amazon.com, for instance, does not collect sales taxes when shipping to California.

Technically, you're supposed to estimate and pay these taxes voluntarily to your home state every April 15. But practically nobody does.

State tax collectors would like to change that. They complain that the Internet is sapping tax revenues and are supporting Enzi's bill to force companies to collect taxes on many out-of-state shipments in the future. Traditional retailers such as Wal-Mart Stores, which collects taxes on shipments from Walmart.com because it has physical locations in every state, are also supporting the bill.

"It is now time for Congress to provide states...with the authority to require remote retailers to collect sales tax just as Main Street retailers do today," Enzi said. Four years ago, in a CNET News.com editorial , Enzi warned: "Other forms of taxes, such as property or income taxes, may then have to be increased to offset these lost revenues."

Critics of this approach warn that it will complicate life for small businesses and be an unfair burden on states like Delaware, Montana and New Hampshire, which do not have sales taxes.

"The tax commissioners are overreaching by pressing Congress for a national mandate on a collection scheme that is still in the oven," said Steve DelBianco, director of the NetChoice coalition, which represents companies such as America Online, eBay, Oracle, VeriSign and Yahoo. "They haven't worked out the software they need to collect, a compensation system for sellers, and the states themselves are still struggling (to put policies into place). In other words, there's a lot of work left to do before pressing Congress for a national mandate."

Tax "fairness and simplification"
Enzi's bill, called the Sales Tax Fairness and Simplification Act (click here for PDF), would affect only shipments sent to participating states. If California joined the so-called compact, for instance, the bill would require Amazon to collect sales taxes even if the state of Washington objected and did not sign up.

The legislation would apply only to businesses with more than $5 million in "gross remote taxable sales" each year.

So far, 18 states have fully signed on. Those include Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Utah, West Virginia and Wyoming. Twenty-two other states, including California, Illinois and Texas, have moved in this direction.

Dorgan's office did not make the second bill, which he also introduced Wednesday, immediately available. But a "discussion draft" seen by CNET News.com would order the Small Business Administration to determine which businesses would be required to comply with the tax collection rules. Congress would be required to ratify that decision.

For mandatory tax collection to take place on mail order and online purchases, the Supreme Court has said, Congress must act. A 1992 case, Quill v. North Dakota, said remote taxing--in the absence of a federal law--violated the U.S. Constitution's interstate commerce clause.

Earlier efforts in Congress to enact such a law have failed , in part because e-commerce companies pointed to the dizzying complexity of taxes. But the states participating in the so-called Streamlined Sales Tax Project hope that if they pledge to simplify their tax systems, they can persuade Congress to make collection mandatory.

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