With all the hype surrounding the recent passage of the Internet
Nondiscrimination Act by the House of Representatives, Internet taxation has become
issue -- at least, as hot as any exceedingly confusing legislative issue ever
How confusing is it?
In a nutshell, the current situation is this: Sales over the Internet are taxed by
state and local governments just like sales from catalog retailers. If a business has a
physical presence in a state where a purchase is made, it must impose that state's
sales tax on the purchase. If there is no physical presence and no sales tax is
collected, the customer is supposed to pay a "use tax" to his or her state, which is
usually the same percentage as the sales tax.
So good so far, but that's just the beginning. The true depth of the tax law
quagmire has only recently been dredged up for discussion, and that happened, most
observers agree, only because the high-profile growth of e-commerce has shined a
spotlight on the complexities of state and local tax regulations. And how confusing is
According to Ryan & Co., a state and local tax consulting firm, there are more
than 36,000 state and local taxing jurisdictions in the United States, and about 7,000
of them impose sales and use taxes. These taxes are based on a traditional selling
model - a local buyer and seller - and governments are now struggling to apply these
laws to the very non-traditional world of e-commerce. Adding to the confusion are the
numerous transactions that are exempt from taxation -- states can declare "tax
holidays" for a limited period of time, they can declare certain products exempt (such
as food or medicine), and they can declare certain customers (such as charities) exempt
from certain taxes.
So an e-commerce merchant, in order to be in full compliance with the law, has to
track all of the rules and regulations of each state and locality in which each of its
customers resides -- that's potentially 7,000 different tax codes, each of which can
change on a yearly basis.
One solution to this mess is tax compliance software such as CORPTax, Taxware, and
Vertex. Another option is electronic "malls," where the mall operator provides tax
compliance and other administrative services.
But a simpler and longer lasting solution would be to standardize the laws.That, at
least, was the conclusion of September 1999 report by Ernst & Young.
"Isolated changes in the sales and use tax system to deal with e-commerce retail
sales will not be sufficient to reduce the unacceptably high current costs of
collecting sales taxes," the report stated. "What is needed is a fundamental
restructuring of sales and use taxes to simplify the system, reduce compliance costs on
retailers and consumers, and prepare the sales tax for the more competitive,
integrative national consumer economy in the 21st century."
State governments are on the case.In April, several states joined together to form
the Streamlined Sales Tax Project, whose mission is to overhaul the existing tax
system "to better accommodate interstate commerce, especially the changes presented by
the growth of electronic commerce...(and to) develop a substantially simplified sales
and use tax system."The group is currently holding open meetings to discuss the issue --
the next one is scheduled for July 13-14 in Chicago.