January 13, 2006, 12:00 AM

Internet sales tax bills headed for compromise, expert says

Two federal bills that support mandatory collection of Internet sales tax are likely to be forged into a single bill that will settle issues like exemptions for small retailers, CCH tax expert John Logan says.

Two proposed federal bills submitted in the Senate that support mandatory collection of Internet sales tax are likely to be forged into a single bill that will settle issues like exemptions for small retailers, John Logan, senior state tax analyst at CCH Inc., tells InternetRetailer.com.

“As we get further into 2006, some of the unsettled issues will get settled, making passage of a joint bill more favorable,” Logan says.

Republican and Democratic versions of Internet sales tax bills were submitted last month by Senators Michael Enzi (R, WY) and Byron Dorgan (D, ND). Each would provide the federal backing sought by the proponents of the Streamline Sales and Use Tax Agreement, or SST, under which 19 states have agreed to simplify the collection of sales tax for Internet and catalog sales across state borders.

But without federal legislation, the SST can only operate as a voluntary program on the part of both retailers and the participating states. Neither Enzi nor Dorgan expects his bill to pass the Senate, but instead lay the groundwork for a new combined bill that could be introduced later this year along with a version from the U.S. House of Representatives, Logan says.

One of the main issues is whether and how small businesses should be exempt from an Internet sales tax. Enzi’s bill specifies that retailers doing less than $5 million a year should be exempt, but Dorgan has called on the U.S. Small Business Administration to set a threshold for participation. Large multi-state retailers, including Amazon, have expressed concern that a high-dollar exemption could let thousands of small retailers, including sellers on eBay.com doing under $5 million a year, sell tax-free at an unfair advantage.

But eBay Inc. and others contend that a national Internet sales tax could stifle e-commerce sales among start-up companies.

Final legislation will also have to work out how retailers will be compensated for tax collection work, and whether some states will be able to delay some rules like destination sourcing. The SST calls for destination sourcing, which requires the retailer to remit the sales tax to the state where the buyer is located.

Although the SST also calls for participating states to provide free tax-collection software to retailers, to lessen the chore of collecting and remitting sales tax, the SST Governing Board has yet to certify any software providers. Those certifications may not come, Logan says, until final rules on destination sourcing and other issues are resolved.

CCH, a publisher of tax and legal information and a unit of Wolters Kluwer, is also a producer of tax-collection software.

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