February 27, 2003, 12:00 AM

Two major cracks appear in the anti-sales tax facade

Wal-Mart Stores Inc., Target Corp. and other retailers last month started charging sales tax on online purchases. The action follows a deal with 37 states and the District of Columbia that grants them immunity from paying any back taxes on past online sales.

It’s said that nothing is certain except death and taxes. Now, perhaps bowing to the inevitable, Wal-Mart Stores Inc., Target Corp. and other retailers last month started charging sales tax on online purchases. The action follows a deal with 37 states and the District of Columbia that grants them immunity from paying any back taxes on past online sales.

Charging sales tax on online purchases has been a contentious issue among retailers, some of whom have argued that charging sales tax puts them at a competitive disadvantage because they also have to charge for shipping, which store-based retailers do not. Others argue that, to the contrary, not charging sales tax gives online retailers an unfair advantage over chain stores.

But surveys have shown consistently that consumers care little about online sales tax and that charging the tax or not does not influence most consumers’ online purchasing behavior. The latest is a report out last month from Jupitermedia Corp.’s Jupiter Research which says that only 46% of online shoppers know they can avoid sales tax depending on which retailer they purchase from. On top of that, only 9% actively shopped around to avoid sales tax, meaning that a meager 4% of all online shoppers actively sought to avoid sales tax. Further, 30% of those who knew about the sales tax disparity-14% of all consumers-shopped around occasionally to avoid the tax. All the rest didn’t care.

Analysts say a number of factors have come together to prompt retailers to willingly charge sales tax. For one thing, the economy is killing many states’ budgets and so states are pushing harder to find ways to fill the gaps. For another, retailers have realized that cross-channel integration is important and it makes no sense to keep channels separate simply to avoid sales tax. “The benefits of multi-channel integration overwhelmingly outweigh the importance of sales tax avoidance,” says Jupiter analyst Ken Cassar.

Further, analysts say, retailers like Wal-Mart and Target, because of the broad presence of their stores, have reached the point where it’s become difficult to claim an exemption from online sales tax. The U.S. Supreme Court has ruled that retailers with a physical presence, or nexus, in a state from where a consumer makes a purchase can be required to collect sales tax for that state.

Because the Supreme Court did not clearly define what constitutes physical presence, states and retailers have differed on what would actually require collection of online sales tax. Even states differ from one another. While one state might say the presence of a few retail employees in a state establishes physical presence, another might not, says John Logan, tax analyst with CCH Inc., Riverwoods, Ill. “States are all over the board about what constitutes nexus,” he says.

And that has left much open to interpretation, giving retailers little impetus to go along with a tax system that could require them to sort through a huge number of taxing jurisdictions.

But with a resolution to the tax collection issue looming, retailers with integrated online and brick-and-mortar sales are finding it difficult to avoid the tax issue. “That opens them up to charges from states that their physical stores are acting as a sales agent for their dot-com operations,” Logan says.

Wal-Mart admits that closer ties between WalMart.com and Wal-Mart stores have persuaded it to collect online sales tax. “WalMart.com is becoming increasingly integrated with our store operations, and this creates a presence for WalMart.com in all states,” a spokeswoman says. Wal-Mart also wants to support the funding of state services hurt by declining state revenues, she adds.

Of the 46 states and the District of Columbia that collect sales tax, all but three - Arizona, California and South Carolina-are expected to join the agreement regarding a waiver of back taxes, Logan says. Delaware, Montana, Oregon and New Hampshire do not collect sales tax.

Logan adds that states participating in the sales tax pact have agreed to let retailers collect only one statewide tax, which states will then distribute to local jurisdictions.

On their web sites, WalMart.com and Target spell out the terms of their tax collection policies. Figuring that more states will soon join the pact with retailers, Target notes that purchases made from Target.com, which covers all Target retail brands, including Marshall Field’s and Mervyn’s, are subject to sales tax in all states that charge sales tax except Alaska, Hawaii and Vermont, where it has no stores or other physical structures. It also notes that purchases made from Amazon.com, which powers the Target site, are subject to sales tax in North Dakota and Washington, the only two states where Amazon maintains physical operations.

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