By Andrea McKenna Findlay
It’s been only a few months since Congress last debated the Internet sales tax issue. But as Congress’s moratorium on Internet taxes approaches expiration on Oct. 21, the topic of who gets taxed, when, where and how remains a hot issue. In early August, the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law voted to extend the moratorium on Internet taxes, known as the Internet Tax Freedom Act. But the action failed to address the sales tax issue. And since then some new factors have emerged that could help move the issue forward.
For starters, a group of state government officials and members of the business community have formed a new project to study the compensation that retailers receive for collecting sales tax and how that compensation might apply to online purchases. Some states compensate retailers for the cost of collecting tax while others do not. The pending argument between state governments and retailers regarding the collection of sales tax on online transactions is prompting the new group to look at how much it will cost retailers to collect taxes both before and after potential tax law simplification, says Diane Hardt, a co-chairperson for the Streamlined Sales Tax Project which is seeking to develop a legislative model to simplify tax laws for retailers.
The yet-to-be-named collection cost study is working on a Request for Proposals to commission the study to an outside party. That RFP should be completed by the end of October, sources tell Internet Retailer. The study is being co-chaired by Wayne Zakrzewski, tax manager at J.C. Penney Co. Inc., and Dan Bucks, executive director of the Multi-state Tax Commission.
In another development, two technology firms that serve the government and tax markets are merging. Government electronic payment service provider govONE Solutions LP, which provides payment services to 23 states, acquired tax software provider Taxware International Inc. Aug. 21. Taxware is a certified service provider for the Streamlined Sales Tax Pilot Project in North Carolina. The pilot also is running in Michigan, Wisconsin and Kansas. Taxware automatically calculates sales tax for users via a remote Internet server and sends the information to a seller’s web site so customers can see the sales tax on their purchases. Using this type of software eliminates the retailer’s need to develop an inhouse tax-calculating system, the cost and complexity of which have long been a concern for retailers averse to dealing with online sales tax collection.
By integrating the services of both companies, govONE will be able to offer its government clients a solution to the demand for a technology that they can use to calculate and collect e-commerce sales tax. A known entity in payments to governments, govONE processes 40 million payments valued at $1 trillion per year and is considered a leader in government payment services. Taxware will operate as a division of govONE Solutions.
Forrester Research says the deal between govONE and Taxware will provide the technology needs envisioned by the SSTP and Forrester believes this will encourage Congress to grant states the ability to collect taxes on remote sales by 2005, says Jeremy Sharrard, Forrester associate analyst. He believes that a technology provider that can handle government payment processing as well as sales-tax calculations will hasten the adoption of online sales taxes.
First test
And in yet another development, online retailer O.C. Tanner Recognition Co., a provider of employee recognition products, is using the technology developed by Taxware to test the sales tax calculation and remittance software for the Streamlined Sales Tax Project. The test went live Sept. 6. Taxware is the first certified service provider. Certification means that the states in the project have certified that Taxware’s system calculates the taxes properly. As a result, the states will assume the calculations on O.C. Tanner’s tax returns are correct. The SSTP says this is the first time that any taxing authorities have certified transaction tax calculation software.
But even with the possibility of a survey that lays out the cost of tax collection and the likely improvement of tax software available to the market, the future of Internet sales tax resides with Congress, where two bills continue to gain momentum. Senate bill S. 512 and House bill H.R. 1410 both extend the tax moratorium for four years and expand states’ ability to collect from remote sellers. But the two bills require states to dramatically simplify their sales tax systems. Opposition bills include H.R. 1552, the one the Judiciary Committee’s subcommittee approved in August, and H.R. 1675, both of which permanently extend the moratorium on Internet access taxes and extend a five-year moratorium on multiple and discriminatory taxes on e-commerce. Yet another Senate bill, S. 288, sponsored by Sen. Ron Wyden (R-OR), requires states to simplify taxes first before allowing them to collect taxes from remote retailers.
Players on both sides of the issue are digging in their heels: the National Retail Federation and the National Governors Association, on the one hand, favor collecting sales tax on Internet purchases while the Direct Marketing Association, on the other, opposes it. They continue to spar on the issue, releasing statements with every movement. The NRF, seeking to level the playing field among online and offline retailers, spoke out against the two House bills, (H.R. 1552 and H.R. 1675) sponsored by Rep. Christopher Cox (R-CA), that would extend the Internet Tax Freedom Act for five years without addressing the sales tax issue. “In an industry where profit margins are as narrow as they are in retail, the lack of sales tax is a significant price advantage,” says Scott Cahill, vice president of government and industry affairs. “We believe there should be a level playing field, where sales tax is collected regardless of where you sell. Every retailer should have the same collection responsibility. We don’t oppose the moratorium. What we oppose is that it does not address the sales tax loophole.”
On the state government side, the National Governors Association also supports efforts to address Internet sales tax. In late August, 44 of the nation’s governors submitted a letter to Congress urging rejection of a ban on Internet taxes. The association also is in support of the Streamlined Sales Tax Project, which seeks to simplify the various state sales tax laws, including those that would apply to online sales. State governments express concern over losing potential tax money on Internet commerce and are aiming to develop a clearer tax initiative that would allow them to collect on retailer’s online sales. The Streamlined Sales Tax Project now has 33 states participating, 18 of which have enacted the simplification of taxes into law.
A taxing web site
The most recent impact study on online tax revenue is Forrester Research’s Making Net Sales Tax Pay, which reported last November that states could be losing upwards of $13 billion in sales tax revenues by 2004, based on the growth of e-commerce. Legislative hearings have suggested that taxing jurisdictions collect in total about $260 billion in sales tax. Thus the lost revenue from e-commerce sales equals about 2% of all sales tax. However, the report also says that concerns about the effect sales tax has on consumer shopping behavior may be overblown. Only 22% of 8,900 online buyers surveyed regularly shopped around to avoid sales tax online, while only 13% abandoned shopping carts because of sales tax.
The NRF and the National Governors Association, however, do support a bill (H.R. 1410) from Rep. Ernest Istook (R-OK) and Rep. Bill Delahunt (D-MA) that calls for states to streamline the tax system. In the Senate, the NRF supports the companion bill (S.512) sponsored by Sens. Byron Dorgan (D-ND) and Mike Enzi (R-WY).
To further strengthen its position and educate constituents as well as the public, the NRF launched a web site in mid-August to address the sales tax issue—www.salestaxfairness.com. The web site explains the complexities of the more than 7,000 state and local jurisdictions that impose sales taxes across the country. The site lists proposed laws and contact information for elected representatives.
On the other side of the fence is the Direct Marketing Association, which is in favor of the moratorium extension without addressing the sales tax issue. It supports the Wyden bill in the Senate, S. 288 and Cox’s two bills in the House, H.R. 1552 and H.R. 1675. Retailers who are part of the DMA believe that e-commerce needs time to develop before sales taxes are applicable. “This moratorium provides an excellent opportunity for e-commerce to continue to develop and flourish,” Frank Julian, operating vice president and tax counsel at Federated Department Stores Inc. and chairman of the DMA’s Use Tax Steering Committee, said in a statement following the House subcommittee’s vote in favor of extending the moratorium.
Not total opposition
Retailers who support the DMA’s approach believe that not charging sales tax gives retailers a chance to compete online with larger retailers as e-commerce becomes more popular with consumers. With thin margins and a propensity for losing money, online retailers are looking for all the cost-savings they can get. Having to add a tax collection management department could be too costly for some retailers to justify having an online presence, the DMA argues.
Jerry Cerasale, senior vice president of government affairs at the DMA, says the introduction of an Internet sales tax would be a barrier to entry for small start-ups as well as for other retailers that may be able to build a sales base online. In addition, Cerasale notes that the DMA does not carry blanket opposition to all Internet sales taxes. The law now requires that retailers who have a physical presence in the state where a buyer is located charge sales tax in that state. Most DMA members do not have a physical presence in most states, thus the DMA does not oppose that tax requirement. “We think it’s fair to require sales tax where retailers have a physical presence and we’re willing to support that for the Net,” Cerasale says. “We’re also willing to talk with states as they look at tax simplifications where there would be one rate instead of 50 different rates.”
That’s progress
Despite the many legislative hurdles, observers say the issues are at least moving forward, especially since all the groups concerned support a tax simplification effort. “The government has made incredible progress. There is a concerted effort from the states to simplify their tax laws,” Cahill says. Market participants are hopeful that once bills from the Senate and the House are in conference the issue of Internet sales tax will at least reflect a hybrid of the two bills. “Congress is probably going to extend the moratorium again but it’s a matter of how long and how much power they’re going to give the states within the wording of the moratorium,” says Forrester’s Sharrard. He expects Congress to extend the act for more than one year but less than five years, which many participants hope will give states and retailers enough time to institute sales tax simplifications.
But given that they’ve had since 1998 to come to terms already, no one is holding his breath. Says one observer regarding the actual implementation of simpler tax laws: “It seems as if everyone involved has set the bar so high that it will be impossible to overcome.”
