December 26, 2000, 9:55 AM

The Sales Tax Tug-of-War

The pressure is on: Main Street retailers and the big chains, not usually lovey-dovey, are pushing for the same resolution to the thorny Internet taxation issue. A year ago, they, as well as many state and local tax administrators, were pinning their hopes on the congressionally appointed Advisory Commission on Electronic Commerce to resolve the controversy over Internet taxation. But when that panel dissolved without reaching a consensus on a fair and effective way to apply sales taxes to e-retailers, the pressure began to mount for the advocates of a level playing field to develop their own solution. Congress added more fuel to the fire by moving quickly on legislation to extend the existing Internet taxation moratorium and taking other steps that major bricks-and-mortar retailers say will undermine efforts to apply sales taxes equitably to all sellers.

“If Congress extends the current Internet tax moratorium without approving legislation to achieve a level playing field for all retailers, future resolution of the issue will be seriously jeopardized,” contends Wal-Mart Vice President David Bullington.

His counterpart at Sears, national taxation expert Chip McClure, is concerned that if the states can’t resolve this issue among themselves quickly, public resistance to taxing electronic commerce could grow so strong that a solution may become politically impossible. “I suspect we have only about 24 months to come up with a workable system,” he says. “If it takes longer than that, the cure may come too late.”

Others, including Illinois State Sen. Steven Rauchenberger, suspect the states may have even less time to fashion a solution to the Internet sales tax dilemma. “This issue is going to flash and pass in the next 18 to 24 months,” he warned state tax officials recently. The problem, according to Rauchenberger, is that “Congress doesn’t believe we [the states] can simplify” the present multi-state sales tax structure.

No silver bullet

For their part, congressional leaders see the issue through a different filter. Rather than focusing on the threat facing states and municipalities from untaxed electronic commerce, House Judiciary Subcommittee Chairman George Gekas (R-Pa.) opened recent hearings on the issue by warning that “current multi-state taxing complexities threaten to stymie the full commercial potential of the Internet.” Either way, part of the solution revolves around technology. The good news is that a growing number of software companies are developing powerful new programs that promise to streamline sales tax collection, both on the Internet and from traditional bricks-and-mortar sellers. Some of these systems are already in use by tax authorities in certain parts of the country. Washington state, for one, has developed a Geographic Information System, or GIS, that provides retailers hooked up to the Internet with the ability to determine the exact tax applicable to a street address.

This fall, tax administrators from a number of states will implement a pilot project to road test the capabilities of a number of existing sales tax collection software programs. At least four states-Kansas, Michigan, North Carolina and Wisconsin-have already signed on to participate in the test, and more are expected to join.

But while supporters of the multi-state pilot call it a useful first step toward developing a workable collection process, they harbor no illusions that this test will provide the entire answer.

“Technology is not the silver bullet that’s going to resolve this issue,” Sears’ McClure acknowledges. Even if the ideal software is developed, states will still need to muster the information systems personnel to make it work in the real world.

Many uniformity choices

Even more daunting is overcoming the lack of state-to-state uniformity on sales-tax structures. The thorniest problem of all-finding a feasible way to implement a multi-state system for collecting sales taxes from hundreds of tax jurisdictions across the country-can’t begin to be addressed until state and local governments can agree on a way to simplify the sales tax hodgepodge.

Since mid-1998, tax administrators from Idaho, Utah, and Washington state have been working together to inject some uniformity in their respective sales tax codes under the Northwestern States Sales Tax Pilot Project. Based on meetings with business groups and elected officials, the three states plan to press for sales tax uniformity legislation this year.

Meanwhile, the Multistate Tax Commission has been working on a considerably broader Sales Tax Simplification Project to make administering sales taxes among states uniform. To date, more than 25 state subcommittees have been established to address specific in-state sales tax simplification issues. In addition, a Multistate Tax Commission national committee is grappling with such prickly areas as exemption processing, uniform refund claim procedures, and a uniform sales tax situs for taxable tangible personal property and services.

The National Governors Association and the National Conference of State Legislators are promoting the so-called Zero Burden Sales Tax Administration System that Utah Gov. Mike Leavitt championed during his stint on the EC Advisory Commission.

Most of the attention now, however, is focused on the Streamlined Sales Tax Project-launched in late 1999 by 30 states to simplify the “sales and use tax system that eases the burden of state use and tax compliance for all types of retailers, particularly those operating on a multi-state basis.”

Idaho Tax Commissioner R. Michael Southcombe, chairman of the Multistate Tax Commission and a booster of the newly coordinated Streamlined Sales Tax Project, believes that the changes likely to stem from this effort “will bring radical simplification and uniformity to the tax system.”

But, the question is, will they come soon enough?

McClure is hedging his bets. While the Sears tax expert is confident that the states have no more that two years to hammer out a solution, he’s uncertain whether that timetable can be met. Although there’s plenty of sales tax activity in the states, “I have no idea when we can expect to see any solid results from these efforts,” he says.

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