Tax group in standoff on Net tax issues

A study of Internet taxes recommends one sales tax rate per state so long as agreement can be reached on a variety of other complex state and local tax issues.

WASHINGTON--A study of Internet taxes recommends one sales tax rate per state so long as agreement can be reached on a variety of other complex state and local tax issues.

The report by the National Tax Association, more than two years in the making, foreshadows the difficult issues faced by a congressionally appointed panel that's examining Internet tax issues.

The NTA electronic commerce group, which includes representatives from companies such as America Online, said that none of the recommendations stand unless agreement is reached on a variety of controversial issues. And the group failed to reach agreement on matters such as expanding the duty of mail order firms, Internet retailers, and other "remote sellers" to collect sales and use taxes. The group also didn't make a recommendation on uniform treatment of business purchases so companies could avoid paying a tax on a tax.

One of the report's authors, Mark Nebergall of the Software and Information Industry Association, said the fact the group produced the report at all was a significant development. "We like the vote we took on one rate per state, but that's contingent on a lot of things we never got to," Nebergall said.

The National Tax Association was attempting to find ways to simplify the collection and administration of sales and use taxes nationwide. There are about 7,600 state and local jurisdictions that impose a sales tax nationwide.

Local tax base at risk
The National Governor's Association and other local government associations fear the rise of Internet sales, which span state lines and city limits, could erode the local sales tax base, which funds basic services such as police and fire protection. Internet sales currently are taxed similar to mail order sales: The consumer is obligated to pay taxes required by the state and local governments where the consumer resides.

The report addresses the complexity retailers located in several states face in complying with varying state and local tax laws. The NTA didn't make a specific recommendation on how to simplify state and local tax administration yet it spelled out three general solutions. One would have a multistate retailer register, file tax returns and pay taxes in only one state; another would use electronic technology to handle payment of the sales and use taxes; and the other would have each state responsible for collecting taxes within its borders.

Meanwhile, the accounting firm Ernst & Young issued a study today that shows "the current sales and use tax system imposes excessively high compliance costs on multistate retailers," which could stymie the ability of small and medium- size Internet retailers to expand nationally.

"For companies that must collect sales tax in multiple jurisdictions, the collection costs can be as high as 87 percent of taxes collected," the Ernst & Young study said. The study was funded by the eCommerce Coalition, a business-backed group organized around Internet commerce issues.

Members of the National Tax Association are expected to testify next week when the 19-member Advisory Commission on Electronic Commerce meets in New York to work on a solution to the Internet tax issue. Congress created the commission as part of the 1998 Internet Tax Freedom Act, which imposed a three-year moratorium on new Internet taxes.

Copyright 1999, Bloomberg L.P. All Rights Reserved.

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