Internet's days as tax-free sales venue are numbered

August 17, 2005|By Jay Hancock

THE INTERNET taxes are coming!

The Internet, a politically sacrosanct paradise of tax-free Outkast CDs, Dan Brown books and broadband service for a decade now, is under attack again by the revenuers. And this time they're making progress.

On Oct. 1 a dozen states will bypass Congress and launch a coordinated sales-tax collection regime aimed at shoppers buying goods across state lines on the Internet or in catalogs.

It's voluntary for Amazon.com, Lands' End, Walmart.com and other Internet stores to collect these taxes. But Accounting Today reports that on Oct. 1 "online retailers are expected to begin compliance with sales tax collection for all sales that are made to customers receiving goods" in states that have signed onto the deal, including West Virginia, New Jersey and North Carolina.

If you live in West Virginia, for example, faraway catalog and Internet merchants would begin adding the state's 6 percent sales tax to whatever you buy and remitting it to acting Tax Commissioner Virgil T. Helton.

The fact that online vendors such as Amazon, states such as Maryland and Congress itself have balked at the initiative, called the Streamlined Sales Tax Project, should not obscure the central reality. The Internet's days as a rootin', tootin', libertarian tax haven, a virtual Cayman Islands in a modem, are coming to an end. It's open tax season on Internet customers.

Many Internet sellers are already dinging out-of-state customers for sales taxes after knuckling to litigation and other pressure.

"Over the past couple of years, something like 50 or 60 retailers have already started doing this," says Joseph R. Crosby, legislative director for the Council on State Taxation, a big business lobby. "Many of them have decided it's not worth the legal uncertainty, and they've just decided to go ahead and collect it."

Maryland and other states have always maintained that sales tax is owed by residents buying out-of-state merchandise via the Web. But they had no way to get it because vendors didn't add it to the price and consumers weren't exactly queuing up to pay it on their own. Periodic rhetoric from Washington about keeping the Internet "tax free" also discouraged enforcement.

By one widely quoted estimate from the University of Tennessee, states lose some $20 billion a year in revenue because of unpaid taxes on Internet sales.

But in recent years, states have sued Internet retailers and won, aided by the fact that the merchants are increasingly affiliated with in-state, "bricks-and-mortar" stores, making them legally vulnerable to taxation.

Late last year, Wal-Mart, Target and Office Depot signed a $2.4 million settlement with Illinois, which had sued to collect tax on Internet sales by those companies. This year, Borders.com lost a similar case in California. Walmart.com now collects sales taxes for every state that has them, including Maryland. So does Sears.com and its catalog affiliate, Lands' End, a spokeswoman said.

The Streamlined Sales Tax Project is a long-simmering response to a 1992 U.S. Supreme Court finding that online retailers didn't have to collect sales tax for states in which they didn't have a physical presence. Keeping track of more than 7,000 local and state sales-tax jurisdictions, the court found, would have been too onerous for even the biggest Web merchants.

The streamlining initiative is supposed to make tax collection palatable by distributing free or cheap tax software to Internet sellers, harmonizing tax categories across state borders (is a Hershey bar "food"?), having states handle many of the complexities of local sales taxes and offering amnesty to merchants who sign up.

Amazon stands pat

That's not good enough for Amazon.

"For us, we're not going to change anything," says Rich Prem, the company's director of global consumption taxes. Amazon will continue to collect sales tax only in the few states where it has distribution centers or headquarters until other details are worked out, he said, such as adequate compensation from government for collecting the taxes.

For its part, Maryland is monitoring the streamlining project but hasn't signed on. That's partly because it would have to change its formula for charging the 5 percent tax on purchases that aren't in 20-cent increments. Such a change would immediately cost $18 million a year, says Deputy Comptroller Stephen Cordi.

And it is partly because authorities don't expect the project to immediately produce much new vendor participation or revenue.

But Crosby, of the Council on State Taxation, says "it's likely that additional retailers will come in" after Oct. 1. And, he adds, "A year from now, I would imagine that the [Maryland] comptroller's office would re-evaluate whether there's any money to be had."

Congress pressured

This train has left the station. Congress has hesitated to make all Internet merchants collect sales tax, but it's expected to consider doing so again soon and may be swayed if the streamlining project works.

It's also being pressed to correct the disparity in telecom taxation - tax-free broadband phone calls, for example, versus heavily taxed traditional calls, an intolerable situation that can't last.

Nothing dramatic will happen soon. But for Internet taxes, the momentum is unmistakable.

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