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A number of legislative efforts, however, are also providing impetus for cooperation among retailers, analysts say. In California, in addition to the proposed legislation, the State Board of Equalization has ruled that online book retailers Borders.com and BarnesandNoble.com created a nexus by allowing online shoppers to return books to their affiliated physical stores.
The board also ruled that Barnes and Noble stores, by giving customers coupons good for online sales, also established a nexus for its online affiliate. “That created an agency relationship between online businesses and stores, so the state board said they were liable to collect taxes,” says John Logan, a tax analyst at CCH Inc.
The sales tax project may also affect other tax-related efforts in regards to the Internet and business in general. One effort involves the business activity tax, such as may be levied on business income, and whether it can be imposed on a company by a state where it has no physical presence. Although there is no federal action related to BAT imposed on remote businesses, the South Carolina Supreme Court has upheld that state’s imposition of corporate income tax on the royalty income a national retail chain paid to the affiliated holding company that controls its stores’ logo.
Now, concerned that other states may follow South Carolina, some businesses want to link a BAT exemption deal with the SSTP plan. “Businesses want legislation that would require that, if states are granted sales tax-collection authority from Congress, states would not also be authorized to impose BAT on out-of-state business,” Logan says.
The outcome of the SSTP plan could also impact the existing moratorium on state taxation of Internet access fees. Because the moratorium is due to be either extended or terminated on November 1, when Congress could be considering the SSTP plan, it may want to address both issues at once, state officials say. The potential bundling of the two measures is important, they add, because of past expectations of Internet sales tax opponents to make the moratorium permanent and cover sales as well as access taxes.
“Congress could tie it altogether,” Hardt says. “It could extend the moratorium permanently, but then, we hope, allow the states to mandate collection of online sales tax.”
Illinois says “No” to sales tax amnesty
As hard as states are trying to make it easy for online retailers to collect sales tax-and, in turn, help states rebuild their revenue-the cooperation from states will only go so far. The state of Illinois is taking legal action to force Wal-Mart Stores Inc., Target Corp., Office Depot Inc. and two smaller retailers to pay uncollected back sales tax, a move that would disqualify them from a much-heralded tax amnesty program offered by most states.
Illinois State Attorney General Lisa Madigan says the collection of back online sales tax would help her state make up a current budget shortfall estimated at $2.5 billion to $5 billion. “We have to bring in revenues where we can,” she says.
Illinois State Sen. Steven Rauschenberger, a former retailer of home furnishings who has played a key role in working out details of the Streamlined Sales Tax Project, says the amnesty provision is vital to motivating retailers to begin to voluntarily collect tax for online sales. “The amnesty provision is critical to the passage and the success of the project,” he says. “Why would any retailer put his head in the noose voluntarily? We can’t use retailers’ participation to turn our lawyers loose on them.”
But the amnesty provision, he adds, was not intended to give a blanket reprieve to retailers who have already been cited for not complying with existing tax-collection laws. “It wasn’t intended to give freebies to anyone already under litigation or a collection action,” he says. Because Illinois has yet to sign on to the Streamlined Sales Tax Project (though Rauschenberger predicts it eventually will) any retailers cited now in the lawsuit would not be able to participate in the amnesty program, he says.
The Illinois lawsuit, which the state recently joined as a plaintiff, was filed under the state’s whistle-blower statute by Stephen Diamond, an attorney with the Chicago law firm of Beeler, Schad and Diamond. Diamond, who stands to collect at least 15% of any fines the state may collect in the lawsuit, contends that he personally made several purchases on Target’s web sites and was never taxed. He contends all the retailers in the suit have been obligated to collect tax for online sales because they maintain stores in Illinois that support their web sites. Although consumers are obligated to remit sales tax if it’s not collected by retailers, they seldom do, state officials say. Diamond says he paid the sales tax on his online purchases. Diamond also says he is working with lawyers in 45 other states to expand the number of states suing retailers.
Wal-Mart and Target have begun collecting tax for online sales under the amnesty program, which began in February. Although Wal-Mart admits that it has been more closely integrating its online and store operations, a spokeswoman says Walmart.com denies that it broke the law in Illinois. Target and Office Depot did not return calls for comment.
Amnesty for Back Sales Taxes
(States that have agreed to let Wal-Mart, Target and other participating retailers off the hook for any uncollected back sales taxes, in return for their voluntarily beginning to collect taxes earlier this year.)
District of Columbia
Considering the amnesty plan