Renewing the push to collect Net taxes

Thirteen states soon will begin simplifying administration of their sales taxes. But will out-of-state retailers ever collect them?

Anne Broache
Anne Broache Staff Writer, CNET News.com
Anne Broache
covers Capitol Hill goings-on and technology policy from Washington, D.C.
5 min read
State officials plan to revive this fall their push to force Internet and mail-order vendors to collect sales taxes from their out-of-state customers.

On Oct. 1, 13 states will officially launch reformed systems that pledge compliance with the Streamlined Sales Tax Agreement, first devised in 2002 by a committee of state tax officials and billed as a way to make tax administration simpler and more uniform. Five more states have passed laws that, over the next two years, will bring them into compliance with the agreement.

Compliance with the system won't change the fact that tax collection remains voluntary for companies without a physical presence in the states where their orders originate, thanks to a 1992 Supreme Court decision.

But project backers say they hope the streamlined system, even with voluntary compliance, would attract participation from multistate companies that say the current tax system is too complicated.

"In some ways, this has absolutely nothing to do with the Internet," said project co-chair Scott Peterson of the South Dakota Department of Revenue. "What we're trying to do is simplify sales tax administration, whether that's for the downtown hardware store, 1-800-Flowers, or Walmart.com."

That means smoothing over differences among state tax procedures. For example, some states distinguish soft drinks from food when deciding tax rates on each, but the definition of soft drink varies widely, Peterson said. His project's solution? "Anything with less than 50 percent juice is considered a soft drink," he said. "Fifty percent or more, it's considered food."

The next step is to make collection by out-of-state vendors mandatory.

The National Governors Association and the National Council of State Legislators, among other groups, are lobbying Congress to introduce a measure this fall that would recognize the streamlined sales tax agreement and force all companies, including "out-of-state or remote vendors," to collect sales tax from customers in states that subscribe to the agreement, said David Quam, federal relations director for the Governors Association.

A tax-collection headache
In 1992, the U.S. Supreme Court concluded that a remote or mail-order retailer has to collect sales tax only from customers who order from states where the retailer has a physical presence. But even that decision doesn't leave shoppers off the hook.

Collection agencies
The Streamlined Sales Tax Agreement is gathering adherents, with 13 states coming into compliance Oct. 1, and five more set to do so within two years.

• Oct. 1, 2005: Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota, West Virginia.

• Within two years: Arkansas, Ohio, Tennessee, Utah, Wyoming.

• States with no sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon.

Technically, those who live in states with sales taxes--there are 45 of them, plus the District of Columbia--are already supposed to pay fees on their out-of-state purchases, even if they were seemingly "tax-free." That's because all of those states have a use tax, typically levied at the same rate as the sales tax, on out-of-state items their residents have bought tax-free. If the item was bought out of state but taxed at a lower tax rate, some states, such as California, ask their residents to pay their home state the difference upon their return.

Most people, however, don't bother to file the returns. According to a 2004 study from the University of Tennessee's Center for Business Research, the states lost an estimated $15 billion in revenue because of their inability to collect taxes on certain e-commerce operations. The paper's authors predicted that number to climb to as much as $34 billion in 2008, based on a high-growth model.

Congress has already attempted--without success--to compel all businesses to collect taxes from customers living in states that back the streamlined plan.

In October 2003, Sen. Michael Enzi, a Wyoming Republican, introduced the Streamlined Sales and Use Tax Act, which would have required all businesses with a gross income of more than $5 million to gather the fees.

An identical bill was introduced on the House side, after which Rep. Bill Delahunt, a Massachusetts Democrat, remarked, "Brick-and-mortar businesses--and the communities that depend on them--

cannot continue to bear an unfair sales tax burden from which their on-line competitors are effectively exempt."

But neither measure made it out of its respective committee, and no hearings occurred.

"That didn't surprise any of us," said Peterson, the reform project co-chair. "We were thinking, Don't pass this thing now, we're not ready. Let us get this thing up and running, make us prove this thing actually works. Our task is to prove that we can make this thing work."

Outcry from e-tailers
No one's sure how many remote vendors that aren't currently obligated to collect out-of-state taxes will volunteer to do so beginning Oct. 1.

Approximately 94 percent of the 100 largest retailers, including Wal-Mart Stores, Target, Sears, Best Buy, Circuit City and RadioShack, already collect sales taxes from their online customers in states where they operate a physical location, according to a 2004 report by Forrester Research.

"That just leads me to suggest that a big chunk of this 'shortfall' is self-correcting," said Steve DelBianco, executive director of the NetChoice Coalition, whose members include 1-800-Contacts, eBay, America Online and Orbitz.

NetChoice supports the streamlined system in theory, DelBianco said, but the organization is skeptical about whether state tax officials have gone far enough in their plan.

eBay, in policy statements published on its government relations Web site, called the system "remarkably unsimplified," noting that it allows for a different tax rate for each ZIP code--as many as 49,000 jurisdictions--as opposed to the some 7,600 state, county and city zones that exist today.

"Now is not the time to impose new tax burdens on American consumers and small-business owners, or do anything to hamper the growth of e-commerce," the Web site said.

But that wouldn't be the case, said Maureen Riehl, vice president of government and industry relations for the National Retail Federation, a proponent of the streamlined plan. The proposed legislation would include a small-business exception that would compel only sellers that gross more than $6 million per year to collect sales taxes themselves, Riehl said.

The details of that exception, however, are still being ironed out, DelBianco said.

"It is way premature for the states to ask for or even deserve a federal mandate," he said. "No federal mandate should be given unless and until the states truly simplify, compensate sellers for cost of integration and tax processing, and provide a robust small-business exception that's adjusted over time."