The Net's New Fighting Words: Sales Tax

By Beth Cox | Posted February 10, 2003
Depending on whom you listen to, sales taxes on e-commerce transactions are:
  1. Natural and inevitable, and will create a level playing field for all retailers.
  2. Likely to put a big crimp in online sales and be devastating to small online businesses.
  3. Be so complex as to be unworkable without employing an army of accountants.

There is a lot of sound and fury on this issue and recent reports of sales tax collections being started by some large Internet retailers like Wal-Mart and Target stirred the pot yet again.

But the Internet's biggest retailer, sales giant Amazon.com is taking it all in stride.

"People shop online for selection and convenience, it has nothing to do with sales taxes," said Amazon spokesman Bill Curry.

"We are collecting sales taxes where our partners (like Target) request it, but we (Amazon.com itself) are not collecting sales tax for all the reasons we never have - the administrative and financial burden of trying to put millions of products into the tax rates and definitions and locations of 7,600 different sales tax jurisdictions in the United States," Curry said.

However, that's a burden that state governments are trying hard to ease in their efforts to make sure that sales taxes on goods sold online don't just evaporate.

"The streamlined sales and use tax agreement that was ratified in November 2002 simplifies sales tax collection and definitions and requires states to have one base for taxes," said Neal Osten, director for telecommunications and interstate commerce at the National Conference of State Legislatures.

That agreement, known as the Streamlined Sales Tax Project (SSTP), now goes to each state, which must enact legislation to bring their state and local sales tax laws into conformity.

The goal here, Osten said, is to "reduce the number of sales tax rates per state, and make it so that technology (software) can deal with sales taxes for products sold online."

The streamlined sales tax would establish uniform definitions for taxable goods, solving some of those vexing questions such as whether orange juice is a fruit or a drink (in some states one is taxed, the other is not) and whether a handkerchief is an article of clothing or something else altogether.

It would require participating states and local governments to have only one statewide tax rate for each type of product effective by 2006.

What happened this week is that a number of major retailers that have a physical presence in a lot of states across the country agreed to begin collecting sales taxes on goods sold online.

Did you guys put a gun to their heads, Osten was asked. "No," he said. "Negotiations were between the companies and state government tax administrators."

"The companies that volunteered (to collect sales taxes) have already been supporting this effort," he said. "These are the online subsidiaries of companies that have physical presence in lots of states, and they were nervous that federal or state courts could step in" to enforce demands for payment of back taxes to one government taxing body or another.

Currently, sales and use taxes are owed on all online transactions, but states are prohibited from requiring remote sellers to collect and remit those levies.

A 1992 U.S. Supreme Court decision said states can only require sellers that have a physical presence or "nexus" in the same state as the consumer to collect sales or use taxes. And it's obvious that there's a Wal-Mart just about everywhere, for example.

That nexus thing is why Seattle-based pure-play Amazon.com, for instance, collects and pays sales taxes on goods sold to residents of the state of Washington, but not elsewhere.

"We have been an active participant in the steamlined sales tax project, but the political differences among the states are such that they ducked a lot of the difficult problems," said Amazon's Curry.

Nevertheless, efforts are ongoing, and they include the planned introduction of federal legislation and the ongoing development of software to handle collection and apportionment of sales taxes on goods sold via e-commerce.

Adapted from internetnews.com.

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