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It is that complexity that may keep online stores from having to collect any tax at all, except in states where they have a physical presence, says Joe Crosby, national director of state tax legislative services for Ernst & Young. “If you own a retail store, the tax is imposed based on where your store is located, regardless of where the purchaser lives,” explains Crosby. “But if you are an Internet seller, you potentially could have to deal with thousands of taxing jurisdictions, even if you are only located in one state.”
Until now, a series of Supreme Court decisions has stated that “remote sellers” such as mail-order catalog companies can’t be forced to collect out-of-state sales taxes because the system is too complex. Internet sellers are in the same category.
But rapid growth of the Internet has led state and local governments to re-energize efforts to get Congress to override those rulings and force remote retailers to collect sales tax. The groups have been urging Congress to act for more than two decades. Because of the Internet, Congress may finally pass laws on the issue, analysts say.
“In the next 18 to 24 months, we should have a much more definitive answer about what taxation on the Internet will look like,” Crosby says.The issue is an important one for states, says the National Association of Counties’ Tabor. “We currently lose $4 billion to $5 billion annually from things such as mail-order and Internet sales. Four or five years from now, as the Internet grows, we will be losing another $6 billion each year.”
To enable remote retailers to collect sales taxes, state and local governments are considering various routes to making things simpler. Among policies the National Governors’ Association supports is to enact a single tax rate for each state, says Tim Masanz, group director for economic development and commerce at the association. States would require mail-order and Internet sellers to apply just one tax rate to items being mailed into a state, thus eliminating hundreds of local tax rates. Retailers would submit the money to the state which then would divide the funds among its cities and counties.
“We have to find a way to make the tax easier,” Masanz says. “We’ll have to give up some things, but the advantage is we will get the retailers to collect it for us.”
States have to simplify their tax laws if they want Internet retailers to collect sales taxes, says Walter Hellerstein, a professor at the University of Georgia Law School. “I’m not in favor of tax exemption for anybody,” Hellerstein says. “But businesses have a legitimate complaint that the state sales tax laws are too complicated.”
Others argue that technology can solve the problem without changing the tax rates. State politicians propose giving retailers software that includes tax rates down to the address level, so that when a customer submits an address, tax rates for that state, county and city automatically would be added to the total price. Or a third-party collection system could emerge in which companies collect payments from consumers, give the retailers their share and send the taxes along to the states, Tabor says.
Ultimately, the decision lies with Congress, which has authority to regulate interstate commerce. “We really need federal legislation to solve this,” Hellerstein says.
Congress probably won’t act until it gets a report from the federal advisory commission researching the issue. But progress is slow. The commission had planned to consider a report from the National Tax Association’s Communications and Electronic Commerce Tax Project, which has been working on this issue since late 1996. Yet it has failed to come up with a unified report.
There is plenty of time to sort this out, Crosby says. Ernst & Young recently completed a study that found that many Internet purchases aren’t normally subjected to sales tax anyway, such as travel services. “So despite the fact that the Internet is growing rapidly, I don’t think it’s entirely clear that there’s going to be an equally rapid increase in the amount of ‘lost’ taxes,” he adds.
Even if states are missing out on an opportunity for revenue, the Internet’s economic benefits outweigh that, California’s Andal argues. “Let’s have a hands-off policy on the Internet and let it grow as fast as possible,” urges Andal. “The economic benefits to the country are by far outweighing any modest tax revenue that states could achieve.” •
MargaretAnn Cross is freelance business writer based in Allentown, Pa.
Do Internet Retailers Hold an Unfair Advantage?
Bricks-and-mortar stores have to add sales tax to the price of products they sell, and online retailers with physical stores often collect sales tax as well. Do Internet merchants who don’t have to collect taxes have an unfair advantage?
“It is an advantage, but our customers have to pay shipping and handling charges and that’s an advantage physical stores have.”
director of customer acquisition
“Macy’s has such a strong brand name that we tend to be able to overcome the hesitation based on sales tax when people are shopping on the Internet and have to pay it. At Macys.com, people are probably less sensitive to it than they would be if they were buying a book or a CD from some of the other Internet retailers.”
Kim A. Miller,
vice president of Internet strategies