An end to the free online tax ride nears

As pressure builds, lawmakers consider moving on online sales taxes, but won't act before election

WASHINGTON - Ken Knezek, who owns a business that sells footwear, understands the importance of a sales tax. His business is in Texas, which doesn't have an income tax.

Knezek's company, Bandals Southwest, sells Bandals Footwear, a woman's shoe with some 60 patents for its interchangeable bands, has sales reps in about a half dozen states. This created physical nexus for him, and thus an obligation to collect sales taxes.

There is no way that Knezek said he can administer sales taxes by himself. In one state where he collects taxes, Oklahoma, the city of Tulsa has three different sales tax rates. He hired Tax Cloud, a company that uses Amazon's cloud, to manage his taxes.

Tax Cloud is integrated with 3DCart, a shopping cart service that Knezek uses. He paid a one-time fee for this integration. Sales taxes are automatically calculated, and each month reports are generated. Tax Cloud is reimbursed by the states for its collection, and Knezek pays nothing for the reports.

That is how Knezek solved a problem that Congress has wrestled with for more than a decade. It is an issue that lawmakers seem to be closer to addressing, and if they act the earliest will be during the lame duck session.

There are several active bills, such as the Senate's Marketplace Fairness Act, that impose a tax collection obligation provided states simplified taxes and eased tax collection burdens on remote sellers.

The pressure to do so is not going away. In the fourth quarter of 1999, online retail sales accounted for .64% of total retail sales, or $5.3 billion. Today, in the second quarter of this year online sales represented 5.1% of total retail sales or nearly $55 billion, according to government estimates.

Millions of Americans avoid paying sales taxes because online sellers are under no obligation to collect them. Buyers still owe a use tax to the states, but most don't pay it.

For a state such as Pennsylvania, for instance, the inability to collect sales taxes from remote sellers is costing as much as $410 million in uncollected taxes this year, according to Robert Strauss, a professor of economics and public policy at Heinz College, Carnegie Mellon University, Penn.

The states are getting desperate. They are resorting to legislative and regulatory guerrilla warfare in an effort to force online sellers to collect and Congress to act.

Colorado mandated that out-of-state retailers report purchases by state residents to its tax authorities, who will then get a tax bill. It was declared unconstitutional in federal court earlier this year and is being appealed.

Another method gaining traction in states is to declare that advertising agreements, such affiliate ads, create physical presence for retailers. One such law in Illinois was struck down in federal court earlier this year.

"It's an absolute disaster and much is what is happening is arguably unconstitutional, but [the states] are doing it because Congress has not acted," said Stephen Kranz, an attorney in the tax practice group at Sutherland Asbill & Brennan, of the state's action.

Steve DelBianco, the executive director of NetChoice, said that even though these state efforts fail in court, "they still generate the pressure that they were intended to generate, pressure for a national solution."

The states have also been working among themselves over the last decade to streamline taxes, with 24 states agreeing so far to simplified systems.

Congress is expected to recess on Friday and so if it does take up tax legislation it will be during the lame duck. But there will be a fight if it is brought up. Some lawmakers see the imposition of a sales tax collection requirement as a new tax.

Knezek has no problem with a sales tax obligation provided the playing field is level. He says there are some people who argue for "Buy American" and are up in arms about buying overseas, "but those same people won't buy in their backyard because they can save on sales tax" via a remote seller.

Something that could prod lawmakers to act is Amazon.

Amazon began collecting sales taxes this month in California and in July in Texas, two states where it is building distribution centers to speed delivery. It now collects in eight states.

Just before Amazon started collecting sales taxes in California, Tom Szkutak, the chief financial officer at Amazon, was asked during an analyst call about the impact of taxes on revenue. He said the online retailer collects either a sales tax or a value added tax in 50% of its business around the world.

"We have very good business in those jurisdictions," he said, according to a transcript of the call on Seeking Alpha.

Nearly 12 years ago, Amazon complained to lawmakers that building a tax collection system would be in the high six figures.

But that was before the cloud. Tax Cloud's CEO, R. David Campbell, is bullish on the prospects for a national agreement on sales tax collection. "I don't think you will see a situation where you will go years without action by Congress. The states need the revenue and the technology is there," he said.

Patrick Thibodeau covers cloud computing and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov or subscribe to Patrick's RSS feed. His e-mail address is pthibodeau@computerworld.com.

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This story, "An end to the free online tax ride nears" was originally published by Computerworld.

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