Thirty states approve a plan for Internet sales tax

Representatives of 30 states and the District of Columbia took a step yesterday toward simplifying sales tax laws. Next up: sell the idea to state legislatures, local governments and Congress.

Kurt Peters

Representatives of 30 states and the District of Columbia took a significant step yesterday toward getting billions of dollars in sales tax revenue now lost to untaxed online and catalog sales. By approving the Streamlined Sales Tax Project, the states hope to elicit support from federal lawmakers to implement a nationwide sales tax collection system that would cover all sales regardless of whether a retailer had a physical presence in the state of purchase.

“This is a watershed, because it indicates the momentum behind the sales tax endeavor is building,” says John Logan, senior state tax analyst at CCH Inc., a Riverwoods, IL-based publisher of tax and legal information. “This puts the argument out before the states and will spur them into action to modify their sales tax codes to make them uniform.” And that uniformity, he adds, is key to convincing Congress to enact legislation to mandate sales taxes on all Internet and catalog sales.

The project provides for uniform definitions of products among all of the country’s 7,500 taxing jurisdictions, making it more feasible to implement a nationwide sales tax system for Internet and catalog sales, thereby making it more likely to get action by Congress, Logan says. For now, retailers are exempt from collecting sales taxes on goods sold in states where they have no physical presence, or nexus, according to rulings by the U.S. Supreme Court. The Supreme Court twice has ruled that the difficulty of collecting and remitting sales taxes for thousands of jurisdictions would impede interstate commerce.

Logan notes that the project is expected to trim the number of tax rates that could be imposed on Internet and catalog sales to less than 200 from about 7,500 today.

But detractors say the project is deeply flawed. “If this proposal were enacted by Congress, it would effectively turn every cataloger and e-tailer into unpaid tax collectors for the states,” said H. Robert Wientzen, president and CEO of the Direct Marketing Association. The DMA contends that, instead of cutting the number of tax rates, the Streamlined Sales Tax Project could actually result in a doubling of tax rates from the current 7,500 to 15,000, because the plan would allow for each state to have its own separate set of rates.

Supporters of the project include the National Retail Federation, which says it provides a more level playing field among online, catalog and brick-and-mortar retailers. "Mail-order and Internet companies don’t have to collect sales tax from most out-of-state customers under current law, and the complexity of state tax systems has been one of the reasons they are allowed to get away with that," says Maureen Riehl, the NRF’s vice president and counsel for state and industry relations. "Once the system is simplified, we can convince Congress to apply the same rules to everyone, whether they sell their merchandise from a storefront, over the phone, through a catalog or over the Internet."

Congress is not likely to act anytime soon, probably not before 2004, Logan says. Although approved by 30 states and D.C., the project must become formally adopted by at least 10 states before it can be considered a formal project. But a larger number of states formally adopting the project will probably be needed to get Congress to act, Logan says.

He adds that several things could provide for slow adoption by states. Although the project has received input from business groups as well as other organizations in each state, there still are many business and government groups opposed to adoption. Logan notes that smaller businesses may be less likely than larger ones to support it if they figure the tax-collection system will still be too burdensome. He adds that many local government officials may be disinclined to support common definitions of taxable products if they feel it will relinquish their ability to generate new revenue by imposing new taxes.

“It’s not likely that a large enough number of states will have adopted the agreement early enough for Congress to have an incentive to act next year,” Logan says.

According to the National Conference of State Legislatures, the amount of sales tax revenue lost to Internet and catalog sales amounted to $16.4 billion in 2001 and, without a change in tax laws, is expected to rise to $44.6 billion by 2006.


Streamlined Sales Tax Project, Tax, Tax rate, Tax-free shopping, Taxation in the United States