States seek sales tax simplification
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.
Consumer Internet spending reached $1.3 billion during Thanksgiving week, a 140-percent increase over 1999, according to a report issued last week by Goldman Sachs and PC Data in Reston, Va. But consumer spending at specialty stores and physical malls was down 6.9 percent from last year for the same period, based on a sample of stores, according to the International Council of Shopping Centers in New York.
Council research director John Konarski blamed the economy and longer selling season for the shortfall and said online sales -- which account for less than 1 percent of retail sales nationally, according to government figures -- are still having a minor impact. "But who knows where it is going," he said.
If online retailers have to collect sales taxes from all customers, it will not turn off customers, believes Albert Noyes, executive vice president of online retailer SmarterKids.com. "I don't think sales tax saavings are very evident for people online. In the end, they shop online for the value that the site can deliver and the efficiency," Noyes said.
The tax situation for SmarterKids may change next year. The Needham, Mass.-based company is merging with Earlychildhood.com in Monterey, Calif., which now collects taxes in 28 states, Noyes said.
The states involved in the Streamlined Sales Tax Project are also testing technologies in a pilot program with three vendors: Esalestax.com, in Englewood, Colo.; Taxware International, in Salem, Mass., and Pitney Bowes, in Stamford, Conn.
Connected to a store's retail systems, these service providers calculate taxes on the final bill, as well as remit taxes to the states. If a state conducts an audit, it will examine the tax vendors' systems, not the retailers'. The vendors are paid a percentage of taxes collected, freeing retailers from the administrative burden, said Charles Collins, director of the sales and use tax division at the North Carolina Department of Revenue, one of four states participating in the project, along with Kansas, Michigan, and Wisconsin.
The goal is to combine tax simplification with technology that eliminates tax-processing burdens for retailers, Collins said.
Collins said the states are also investigating the possibility of certifying legacy tax system software typically used by larger companies and freeing those companies from audits if their software meets certain standards.