On Capitol Hill, the year dawned with high expectations that 2004 might see states finally get all the power they want to tax online sales. It didn't happen, and now lobbyists and policymakers involved in drafting the plan say a deal isn't likely to pass Congress in 2005 either.
The result is that the states comprising the Streamlined Sales Tax Project are beginning to divide on strategy. Several states -- including Maryland and Virginia, as well as the District of Columbia -- have put off legislative efforts to modify their sales tax laws until Congress signals its endorsement of the overall effort.
In Tax Debate, Varying Estimates Drive Debate|
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State policymakers frequently cite a 2002 study by two University of Tennessee economists estimating the amount of revenue the states would fail to realize in absence of a national system for taxing Internet sales. Based in part on an aggressive projection for total online sales, the Tennessee researchers concluded that the states would be losing out on $45 billion in tax revenue by 2006.
The Direct Marketing Association, whose members would be affected by any Internet sales tax plan, released a study in June 2003 undercutting that estimate. The DMA concluded that the amount of uncollected taxes on e-commerce would be just $3.2 billion by 2006.
Earlier this year, the states called for a follow-up study from the Tennessee professors. In July, the duo issued another report, claiming that state and local governments lost between $15.5 and $16.1 billion in 2003 from their inability to collect sales taxes from online retailers. The economists also significantly revised down the amount revenue lost to uncollected taxes on online sales, estimating that by 2008 the revenue losses for state and local governments will range from $21.5 billion to $33.7 billion.
The authors of the study cited several reasons for the more conservative estimate, including far less "robust" online sales than previously estimated, and the fact that several major retailers have since struck a deal to collect taxes on all of their online sales in return for amnesty for failing to collect back taxes.
-- By Brian Krebs, washingtonpost.com
Other states, however, are moving ahead on a voluntary system they hope will convince Congress and the White House that taxing online sales can be achieved simply and fairly.
The stakes in the debate, by most estimates, are high. Consumers will spend about $66 billion online this year, excluding purchases at travel and auction Web sites, according to ComScore Networks, a Reston, Va.-based Internet usage tracking company. A study released in July by the National Governors Association and the National Conference of State Legislatures estimated that state and local governments lost $15.5 billion to $16.1 billion in 2003 in revenue from untaxed Internet sales.
A chief selling point for the Internet sales tax movement, the states insist, is that no new taxes would be imposed on consumers. Rather, the states want to enforce existing laws that require people to pay taxes on items they buy from remote sellers such as mail-order catalogs or e-commerce sites. Those laws are rarely enforced, due to the lack of a national system to track sales and levy taxes, and because retailers complain that following tax rules in thousands of jurisdictions around the country would be an administrative nightmare.
"I believe Congress is going to want to see that we're able to do this without slowing down or limiting the ability of people to do business over the Internet," said South Dakota Gov. Mike Rounds (R).
If sales taxes on items South Dakota residents bought
online and from catalog sales this year had been collected, Rounds said, the state would be operating with a 2004 budget surplus of roughly
$5 million, instead of its current $17 million deficit.
But before states like South Dakota can collect those taxes, they need to demonstrate that their plan won't do more harm than good, Rounds said. "We have to show Congress we're prepared to make it easy for Internet businesses to collect taxes on our behalf, but we don't want to go to Washington and promise things we can't deliver."
Leading by Example
Officials at Amazon.com -- one of the retailers that flirted last year with backing the online sales tax drive -- share Rounds's assessment of the congressional outlook.
"A lot of folks in the project have concluded that Congress just isn't going to get too excited about it until the states have a system up and running and can demonstrate to the skeptics in Congress that they're serious about reform," said Rich Prem, an Amazon.com official who works on tax compliance issues.