October 31, 2005, 12:00 AM

Tax time

(Page 2 of 4)

When direct merchants sell to buyers in states where the sellers have no nexus, the buyers themselves are supposed to remit a use tax to their own states based on their state`s sales tax rate. "The way the law stands now, you owe a use tax to the state where you made the purchase if the merchant didn`t charge sales tax," says John Logan, a tax expert with CCH Inc., a publisher of tax and legal information and a provider of tax collection software. But the reality is that few if any consumers ever pay their own use or sales tax, leaving the states without a large portion of what the law says they`re due, he adds.

States formed the SSTP after the Supreme Court`s Quill decision as a way to accept the high court`s challenge and prove that a multi-state system could operate efficiently without imposing a burden on interstate commerce. With an eye toward winning over Congress to support a national, mandatory system, the SSTP set out to certify that a group of at least 10 states, representing at least 20% of the population of sales tax states, had streamlined their tax laws before moving ahead with its voluntary program on Oct. 1.

The 18 states began participation under the SST last month (see map, pages 40-41). As this issue went to press, Nevada was also close to joining the group. Other states are expected to follow suit, and among the 45 sales-tax states only Colorado has said it will probably stay out of the program, Peterson says.

But now the trick is to get merchants to participate, because, without a federal law making interstate tax collection mandatory, the SST can operate only on a voluntary basis.

Seeking a federal law

The larger the number of merchants and states that participate, the better chance SST proponents have of winning federal action, officials say. "The end game is when Congress passes a federal law," Riehl says. "It`s an uphill battle, but we hope to have an authorization bill introduced this fall in the U.S. Senate."

But just how widespread participation will become under a voluntary program depends on how many retailers decide that the benefits outweigh whatever problems they expect to have. The toughest choices will have to be made by retailers with borderline nexus issues, Riehl says.

Retailers that regularly sell into only one or two states where they don`t have a physical presence might choose to establish separate agreements with these states on how to collect sales tax outside of the SST, but then this approach would leave these merchants without the benefits the SST offers. "Retailers will do a cost-benefit analysis and can pick and choose the states they want to cooperate with, but they get the benefits of free collection software and amnesty only if they voluntary participate with all states in the streamlined program," Riehl says. The free software will actually be paid for by the states, figuring that they will get a return on their investment by making sales tax collection--and remittance--easier for retailers.

Although there are some difficult issues to be worked out in the SST program, Riehl and others in the retail industry as well as those in state governments say they believe the SST is on the right track to build a more responsible and equitable system of collecting sales taxes on Internet sales without being burdensome to merchants.

But there still are those who disagree. Critics of the SST program contend that it hasn`t really devised a way to effectively make the overall collection of sales tax simpler and that it could actually make it even more difficult for many retailers to figure and collect the proper amount of tax for each transaction. "If anything, it`s made it more complex," says a spokesman for the Direct Marketing Association, noting that there are more than 7,500 taxing districts in the U.S.

But proponents say that the cooperation that states and many merchants have shown so far in working toward a streamlined tax program will continue to work out remaining issues that could only be addressed once the program started. "I`ve been participating in the SSTP for the past five years, and I believe that the major reason that the SSTP has made significant progress compared to prior efforts is that it has reached out to the business community and taken a collaborative approach," Prem says.

One of the biggest remaining issues, officials say, is finalizing the rules on whether merchants collect a sales tax based on the rate of the origin state, where the merchant conducting the transaction is located, or the rate of the destination state, the location of the buyer.

The SST`s guidelines call for merchants to use the destination state tax rate when selling into a state where they have no physical presence, then remit the collected tax to the buyer`s state. But states that use an origin-based system have been slow to transfer to the destination-state tax because many of their local taxing jurisdictions have opposed a system that would upset the sales tax revenue they have been receiving.

Dell`s deal

Of particular note is Texas, and especially the city of Round Rock, the home of Dell Inc., the second--largest online retailer with $3.3 billion in 2004 retail e-commerce sales. In 20 states where Dell has a physical presence with 130 kiosks in shopping malls, it collects at the destination rate on behalf of the buyer`s state. But all other sales, including in-state transactions, go to Round Rock under terms of an agreement that granted Dell reduced property taxes as an incentive to locate its main operations there.

"Under a mandatory system, when Dell sells to Virginia, where it now has no physical presence, it would collect the Virginia tax and the revenue would go to Virginia," Riehl says. "But that can upset their business model."

Such complications underscore why it`s important for the SST to expeditiously work on such issues to keep the program moving forward, proponents say.

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