Internet Sales Tax May Get Amazon.com's Support

Supporters of a national Internet sales tax proposal are negotiating with Amazon.com in a bid to win an endorsement from the largest online retailer for legislation introduced today in Congress.

The legislation would put the federal government's stamp of approval on a state-led effort to require online retailers to apply sales taxes to nearly all of their transactions. In return, states would simplify their complex tax laws to make collecting taxes easier for Internet businesses.

Backers of the legislation say the plan would ensure that online sellers are required to collect the same taxes as their bricks-and-mortar competitors and would provide much-needed cash for financially ailing states. Amazon's support would be the most substantial yet from the online community, and could mark the beginning of the end of tax-free Web shopping.

Amazon and a loose-knit coalition of state policymakers, retailers and congressional staff negotiated all day Wednesday over the scope of the legislation. According to several sources involved in the talks, Amazon wanted to ensure that most Internet retailers are subject to collecting sales taxes, not just companies that sell more than $5 million per year, as called for under the bill that debuted today.

The last-minute negotiations derailed plans for the Internet sales tax proposal to be introduced today in the Senate, according to Kim Sears, a spokeswoman for Sen. Mike Enzi (R-Wyo.), a chief supporter of the online sales tax effort. Sears said Sen. Byron Dorgan (D-N.D.) and Enzi want time to review Amazon's proposal.

Amazon wants the bill to exempt online merchants if they bring in less than $25,000 per year.

The House sponsors -- Reps. Ernest Istook (R-Okla.) and William Delahunt (D-Mass.) -- rejected the Amazon proposal for now, and introduced their bill this morning.

Companies that make less than $5 million annually on their Internet sales would be exempt under the House bill.

Amazon has built the infrastructure to collect sales taxes for most of the 160 retailers that sell items through its Web site, and believes its competitors should do the same for their merchants, said Paul Misener, Amazon's vice president of global public policy.

"It makes no sense to us for certain large entities doing billions of dollars in business and with extremely sophisticated computer systems to not be able to provide this kind of service," Misener said. "If the system the states have put in place is in fact simplified, and we think it is, it shouldn't cost businesses anything to collect."

Amazon's efforts to change the legislation could doom the states' sales tax plans, said an official with eBay who is familiar with the negotiations.

"The fundamental problem with Amazon's proposal is that it treats someone who sells through one channel online differently than a person who sells through another," said the official, speaking on condition of anonymity. "To discriminate against online aggregators is a guaranteed way to stop any distance sales tax plan for at least 10 years, and we'll go to the mat on that one."

Internet Sales Tax Effort Builds Momentum

Thus far, Congress has been unwilling to give the states authority to tax all online sales, citing a 1992 Supreme Court decision that severely limited states' ability to tax catalog sales. In 1998 and again last year, Congress rejected efforts to give the states taxing authority if they came up with a sufficiently simple tax plan.

To answer that challenge, a group of state tax officials started the Streamlined Sales Tax Project, which has spent the past three years drumming up support for its plan to revamp arcane state tax laws to be more compatible with the Internet economy.

The negotiations with Amazon reflect the coalition's efforts to win support from the business community.

"Part of what retailers and states have been doing in an effort to be successful in their legislative strategy is reaching out to groups that have been critical of this plan and asking what needs to happen to make this bill acceptable to them," said Steve Kranz, tax counsel for the Council on State Taxation.

"On a fairness and level playing field basis, if it buys us the support of Amazon we're willing to include their suggestions," said Maureen Riehl, vice president of state and industry relations for the National Retail Federation and a participant in the negotiations.

The sales tax project has drawn bipartisan support among lawmakers as well, even from traditionally anti-tax Republican lawmakers who say it's not fair that main street stores are required to charge sales taxes while their online competitors are not.

So far, 17 states have enacted legislation to bring their tax codes in line with the agreement. Three states -- Minnesota, Texas and Washington -- have implemented much of the agreement, but have balked at changing the way taxes are collected and distributed.

The legislation requires participating states to charge sales taxes based upon where the buyer lives. Some states, including Illinois, Texas and Washington, prefer to base it on where the transaction takes place.

For Texas, it could have a big impact on localities that depend heavily on local sales taxes. Nowhere is that more true than in Round Rock, home to Dell Computer Corp., the world's largest PC maker. Since its arrival in Round Rock in 1993, Dell has brought with it nearly 10,000 jobs, and its computer sales from its headquarters account for nearly half of all sales tax revenues for the city. That revenue would disappear under the state plan.

Some business interests remain opposed to the sales tax effort. The Direct Marketing Association (DMA), released a study in June undercutting estimates of how much revenue would be generated by Internet sales taxes. The study said that the amount of uncollected taxes on e-commerce would be $3.2 billion by 2006, far lower than the $45 billion projected in an often-cited 2001 study by two University of Tennessee professors.

Amazon's Concerns

Amazon spokesman Bill Curry, in an interview unrelated to the negotiations over the sales tax legislation, said the state plan does not go far enough to simplify confusing tax issues.

Amazon wants the states to consider shipping and handling taxes, taxes on returned merchandise and sales tax holidays -- especially the "back-to-school" tax breaks that are popular with state and local politicians and customers alike.

"We've always said anything that truly simplifies the system we would support, because our business model doesn't depend on not collecting taxes," Curry said. "But this agreement is still far from simple."

Amazon and major main street retailers also say that merchants should get more aid from the states to offset the cost of collecting sales taxes. Nearly half of the states provide some reimbursement, but usually no more than a few hundred dollars per month. Retailers contend that it will be costly to implement systems capable of processing sales tax receipts for scores of jurisdictions.

The legislation introduced today calls for a comprehensive study of just how much retailers spend each year in sales tax collection.

"This study is going to prove what retailers have said all along, that the current reimbursement schemes are grossly unfair to retailers," said Riehl of the National Retail Federation. "If the sales tax system is truly simple, it shouldn't cost anything for retailers to collect and remit these taxes."