States seek sales tax simplification

By Patrick Thibodeau, Computer World |  Government

A STATE-BY-STATE LEGISLATIVE attack on the sales tax advantage many Internet retailers now have over Main Street merchants will begin next year with a drive to simplify complex and sometimes bizarre sales tax rules.

A group of tax and policy officials from some 39 states, meeting as the Streamlined Sales Tax Project, this month may finalize "model" tax simplification legislation for adoption by state legislatures. The state group Thursday posted the proposed legislation on its Web site.

This tax simplification, by itself, will not end the Internet's reputation as a sales tax-free zone, but it would remove a major stumbling block to any agreement concerning online sales tax collections. Congress is not likely to support any national legislation unless many states -- especially large states -- first agree to simplify their tax rules, said Frank Shafroth, a policy expert at the National Governors Association in Washington and a participant in the project.

Many large retailers are supporting the action.

"The [Internet] pure plays are getting the benefit to build their business and their brand without having to pay the same sales tax that others do," said Robert Molloy, vice president and assistant general counsel at Staples in Framingham, Mass.

But Seth Geiger, who heads research at BizRate.com, a Los Angeles-based online retail performance comparison service, says its customer surveys show that the absence of sales taxes on invoices is a "perk" for many customers. Applying sales tax "will put a chilling effect on the growth" on Internet commerce, he said.

Shopping on the Internet is not tax free, although it may seem that way. Under current law, retailers do not collect sales tax on a purchase unless they have a physical presence in the state where the buyer is located. The buyer still owes a "use tax" -- the equivalent sales tax -- but most people never pay it. State officials say they stand to lose billions in tax revenue as online sales increase.

But online retailers and trade groups such as the Direct Marketing Association in New York say they cannot consider broader tax collection obligations unless tax requirements are simplified nationally. A small online retailer, in particular, could be buried in administrative cost if it had to comply with the laws of more than 7,000 state and local taxing districts as well as dealing with odd rules that, for instance, exempt tea from sales tax in one state but tax herbal tea in another, these groups say.

The pressure for taxing online sales is certain to grow.

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