Net tax pressure looms

As commerce becomes more widespread on the Internet, state governments are beginning to demand their cut of the revenues in the form of state sales taxes. But given the borderless nature of the medium, Net vendors can be difficult to pin down.

Many in the online industry seem unconcerned about having to remit sales taxes to states and thousands of municipalities--that is, unless Congress requires them to do so. Therein lies the threat to the relatively hassle-free tax shelter mail-order, telephone, and online sales companies currently enjoy.

Mail-order firms and e-commerce sites don't have to collect state sales taxes from buyers unless they have a physical presence in the territories, which include sales and customer support teams. Most state laws require that consumers, not vendors, report their purchases, and cough up either the sales or usage tax. This rarely happens, local officials say.

In order to stave off legislation requiring that vendors collect out-of-state sales taxes--which they would be responsible for even if consumers didn't pay up--an industry group has come up with a voluntary plan. As reported by CNET's NEWS.COM Monday, the Direct Marketing Association (DMA) is trying to get states and mail-order companies to adopt a "voluntary collection agreement" (VCA).

Companies that agree to the plan would remit taxes to the states every quarter using a "simple" software program, avoiding the various systems and forms for each state, according to the VCA. In return, the states would support the software program and not push for federal legislation because they would be collecting tax revenues.

However, even DMA members who sell products online haven't signed on to the VCA plan. The DMA negotiations with states are dragging as well.

"The association has been in discussions for years with the states. However, it is premature to indicate that these discussions will conclude in a voluntary collection agreement," Robert Wientzen, president of the DMA, said today in a statement.

"Presently, no states are in a position to offer an agreement based on these discussions," he added. "No companies, including those which have lent their support to the VCA discussion process to date, have committed to participate in any eventual agreement."

Some Net retailers who have a clear understanding of the administrative hassle that formal legislation could bring don't seem eager to join the voluntary movement.

"The biggest pain for us would be producing all these tax filings for all these different states, counties, and some cities," said John Pettitt, executive vice president for Software.net, a San Jose, California, company that sells software for shipment or direct download from the Net.

"A lot of our buyers are businesses who pay the tax anyway, because the customer is responsible for paying a use tax; if they don't, they are guilty of tax evasion," he added. "The people who are going to see a difference if a law passes are the regular consumers who don't pay it."

Dell Computer, which sells to consumers solely over the phone and online and is one of the VCA's supporters, is not in a rush to sign the DMA's agreement.

"At this point, it would be premature to say whether we will participate," said Dell spokesman T.R. Reed. "I know that on the telephone side we collect sales taxes from people in Texas, as we are required to do. My understanding is that the Internet sales are not any different than those on the telephone."

Online bookseller Amazon.com isn't overwhelmed by the issue, either. "We only collect for Washington state," said spokeswoman Kay Dangaard. "The sales tax issues are not that important in the drive for sales on the Net. But we would abide by any law that was passed."

For now, the Net industry is more concerned about derailing new Net taxes. Internet access providers particularly have been pushing for passage of the Internet Tax Freedom Act to apply a temporary ban on states and localities passing new taxes specifically aimed at online access and e-commerce. (See related story)

A tax-free Internet won't last forever, most agree. For example, a group of 29 state legislatures that met last weekend began kicking around the idea of a national flat tax on e-commerce. As a single levy that would be remitted to states, the tax could help avoid complex collection processes while ensuring that states get their cut of the digital marketplace's revenue.

At least one online vendor was receptive to the idea but doubted that it would ever happen. "It would be great if you had a national tax rate for e-commerce because e-commerce doesn't understand geography," Software.net's Pettitt said. "It would make life easier for me, but only if it wasn't an extra tax on top of everything else."