October 31, 2005, 12:00 AM

Tax time

18 states are kicking off a sales tax initiative for Internet commerce, balancing the needs of states against the desires of retailers.

It may be too late to reap buckets of tax revenue from this year`s holiday shopping season, but the long battle to launch a multi-state program of collecting sales tax on all Internet sales is finally coming to fruition this month. At least 18 states have agreed to begin participating under terms of the Streamlined Sales and Use Tax Agreement, or SST, a plan drawn up with features like free tax-collection software and back-tax amnesty intended to win broad participation from merchants.

In the planning stages for years, the simplified sales tax plan finally kicked off Oct. 1 as a voluntary program for merchants, though state tax officials as well as large multi-channel retailers who already collect sales tax on Internet and catalog transactions are hoping the built-in incentives will lead to broad participation and, eventually, a mandatory national program as early as next year.

Tough issues

Some tough issues remain with significant implications for the competition between small and large retailers, for catalogers, and even for e-commerce pioneer Dell Inc. But proponents say they expect the remaining issues will be worked out and that the SST is off to a good start toward a national, mandatory program after years of preparation under the Streamlined Sales Tax Project, through which more than 40 states have been working to simplify tax laws.

"The October 1, 2005, implementation date will be an important milestone for both the Streamlined Sales Tax Project and the retail industry," says Richard Prem, head of global taxation for Amazon.com Inc., which for now collects sales tax on purchases in Kansas, North Dakota and Washington, the only states where it has a -physical presence. "The SSTP has made a great deal of progress in creating a vision of a sales tax system that is starting to approach uniformity among state and local governments and that is more simplified so as to eliminate many of the burdens currently facing all retailers, both brick-and-mortar and Internet."

Under the SST program`s current guidelines, participating retailers with more than $6 million in sales will collect sales tax on all transactions, including those currently exempted under federal law when a retailer sells into a state where it has no physical presence, or nexus. But small retailers aren`t necessarily off the hook for the long term, because some of SST`s biggest backers--notably Amazon, with its long list of retail partners and competitors--are pushing for inclusion by retailers of all sizes. A truly streamlined system should make tax collection doable by all sizes of -retailers, Prem says.

Making the program simple for retailer participation has been at the crux of state efforts, tax officials say, because, after two failed U.S. Supreme Court battles, state revenue departments realize that this is their best course toward collecting tax on all transactions regardless of a retailer`s nexus status.

States will lose to retail e-commerce and catalog sales this year an estimated $4.41 billion in sales tax revenue, a figure that will grow to $6.84 billion by 2008, according to a study last fall by the University of Tennessee. When factoring in b2b sales, which account for the lion`s share of e-commerce, the lost-tax--revenue figures rise to a range of $18 -billion to $22.81 billion this year and $21.54 billion to $33.68 billion by 2008, the study says. The university`s Center for Business and Economic Research, which conducted the study, used forecasts of e-commerce sales from Jupiter Research Inc. and applied an average combined state and local sales tax rate of 6.5%.

State tax officials note that that they`re not looking to impose new taxes, but to collect already due taxes that have become harder to collect with the rising tide of e-commerce. "Government doesn`t want to collect new taxes, we just want a system to collect taxes already legally imposed," says Scott Peterson, director of the Business Tax Division in South Dakota`s Department of Revenue and co-chair of the Streamlined Sales Tax Project. "But the way people are switching from shopping in downtown stores to shopping on the Internet, in a number of years we won`t have as many sales to tax any more."

State revenue officials and budget officers aren`t the only ones -advocating the Internet sales tax program. The National Retail Federation has long pushed for the tax to make the retail environment more balanced among both multi-channel retailers with brick-and-mortar chains and merchants that operate mostly on the web and through catalogs, with relatively little of the physical infrastructure that requires retailers to collect tax for purchases made from other states.

"This is about making a tax system that`s fair," says Maureen B. Riehl, vice president of the National Retail Federation and its legal counsel for government and industry relations. "Right now some retailers have this tax-collection responsibility and some don`t. But it should be that we either all have it or none of us have it."

The NRF vs. the DMA

That stance puts the National Retail Federation and the Direct Marketing Association at odds with each other, as the DMA, which mostly represents catalogers, has long supported the status quo. The DMA and other opponents of the tax contend that a sales tax on all Internet sales will stifle the development of e-commerce, particularly among new, struggling e-retailers.

The SST, in its most basic terms, is intended to provide an efficient means for states to receive sales tax revenue on transactions that have been exempt from sales tax since 1967, when the U.S. Supreme Court sided with an office supplies cataloger in National Bellas Hess v. the Department of Revenue of the State of Illinois, ruling that sellers are required to collect sales tax only from buyers in states where the seller maintains a physical presence. The Supreme Court found that imposing sales tax collection duties on non-nexus merchants would create "an unconstitutional burden on interstate commerce." The high court upheld that decision in the 1992 case Quill Corp. v. North Dakota, and noted that the U.S. Congress had the ultimate power to resolve the tax collection issue.

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