October 2, 2001, 12:00 AM

Progress on the sales tax issue, but not in the right direction for some

(Page 2 of 3)

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.”


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