In its second-largest acquisition, Amazon buys the company for $970 million.
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"States like Texas and Washington with an origin-based tax are waiting to see how other states set things up in the governing board," says Warren Townsend, director of sales, use and excise taxes for Wal-Mart Stores Inc.
One way of settling such issues is following the lead of states that forge ahead with solutions, Townsend adds. Virginia and Utah, for example, have been working on systems that assure and spell out how destination tax received from merchants is fairly distributed to all local jurisdictions due tax revenue from a sale.
Retailers are pushing for consistent long-term notices from states on changes to tax rates, avoiding recent occurrences such as when Ohio and North Carolina passed rate changes at the end of their fiscal years in June, effectively creating a rate change overnight. "That`s a problem for retailers," Townsend says, "because our databases have to be updated so we can charge the correct rate." Retailers are hoping for a 30- or 60-day notice policy.
But even that long notice won`t be much help to catalogers, whose books take months to plan and have several more months of shelf life. "As tax rates change, paper catalogs will be out of date," Townsend says.
The big-small divide
The SST as it`s currently designed also leaves some rifts between large and small retailers. Many larger multi-channel retailers have been using their own systems to collect sales tax, some beginning after court decisions in recent years that have forced merchants to pay fines and make good on uncollected sales tax in states where they have nexus.
While the SST is using free tax-collection software to entice -participation by online retailers, many large merchants that already collect tax using their own systems expect similar treatment. "They want to be compensated for the cost of doing collection," says Riehl of the NRF.
A Joint Cost of Collection Study, conducted by consultants PricewaterhouseCoopers and due for completion this fall, is expected to determine the tax collection costs under the SST. The states behind the SST as well as retailers are hoping the results of the study will support federal legislation to mandate a national SST program that would compensate all retailers for tax collection costs, Riehl says.
There is also the issue of whether the SST should force tax collection duties on retailers of all sizes, in effect reversing the exemption for those with less than $6 million a year in sales. "If the system is truly simple, and if the states follow through on their commitments relating to certified service providers and certified automated software that would largely eliminate the costs and burdens of collecting sales taxes, then sellers of all sizes should be able to comply without significant burden or expense," Amazon`s Prem says.
Waiting for the new year
But the political reality is another matter, Riehl says. "Some large retailers think a small-business exemption isn`t necessary, but that may be politically impossible for states," she says, adding that eBay Inc. has taken a leading role in pushing to keep the exemption.
Despite the Oct. 1 kick-off, the SST program isn`t likely to attract many new merchant participants until after the holiday shopping season. "I don`t see any brick-and-mortar or online retailers changing their systems until after Jan. 1," Townsend says.
But that will just give the new SST governing board more time to continue to fine-tune things, such as completing certifications of tax--collection software, proponents say.
"Simplification will be an ongoing effort," Prem says. "After all, it took more than 70 years to create the complexity that exists in the current sales tax system, but the Oct. 1 implementation of the SST is a good first step down the long road of truly simplifying sales taxes."
If the SST program continues to win over more states and merchants, a mandatory federal program will become more assured, experts say. "It`s not certain that Congress will support this, but if more states conform to the SST--and that`s likely--Congress is likely to pass legislation," says Logan of CCH.
With any luck on the part of states, a national sales tax system could be in place for holiday season 2006.
Are digital media products or services?
One of the toughest issues to resolve for all retailers in the Streamlined Sales Tax and Use Agreement, or SST, is how to tax digital music and other digital products and services. "It`s a problem we`ve been working on for years, because digital products keep changing, and how do you define a moving target?" says Scott Peterson, director of the Business Tax Division at the South Dakota Department of Revenue and co-chair of the Streamlined Sales Tax Project.
The challenge lies in the fact that digital music, for example, can be considered either a product or a service--and the difference could determine whether or not it`s taxed, Peterson says. If digital music is downloaded for permanent ownership under Apple Computer Inc.`s iTunes model, states may be more likely to define it as a product, but if it`s rented under the subscription model offered by Napster and others, states may be more likely to consider it a service, he adds.
The issue also complicates tax collection in areas where products and services are bundled together, such as when cell phones are purchased with wireless services, says John Logan, a tax expert with CCH Inc.
Some states like South Dakota are more inclined to tax both products and services, while others tax only products, Peterson says. But the goal of the SST is to have a common taxing system for Internet sales to make it easier for retailers to comply with a multi-state system of collecting sales tax, he says.
Delivery charges present less of a challenge, but still one that needs to be worked out, Peterson says. The issue mainly concerns retailers who object to the additional requirement of adding details to customer invoices. Under the SST, retailers are only expected to collect sales tax on delivery fees charged against taxable items, but under current SST terms retailers are expected to detail in invoices the amount of sales tax collected for each item. "Retailers don`t want to do that since the SST project is supposed to be about simplification," Peterson says.