That leaves the states to focus on simplifying their tax laws in an effort to entice Internet businesses to collect voluntarily.
So far, 19 states have already voted to modify their sales tax codes to make it easier for retailers. By October 2005, the states hope to have a collection system working in at least 15 states representing roughly one-fourth of the U.S. population. Until Congress makes the plan mandatory, however, the states can rely only on a mix of threats and incentives to convince online
retailers to sign up.
In Tax Debate, Varying Estimates Drive Debate
From
washingtonpost.com
at 7:57 AM
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
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Some big Internet retailers have climbed aboard the states' bandwagon. Wal-Mart, Toys-R-Us and Target began collecting taxes on their sales in early 2003, and about 30 retailers are complying in return for amnesty on any taxes they may owe on previous years' online sales, said Diane Hardt, co-chairman of the Streamlined Sales Tax Project.
The states are not too concerned about attracting smaller merchants. Their plan specifically exempts Internet sellers who generate less than $5 million in annual sales. Instead, they hope the plan will appeal to major online retailers with a substantial unpaid-tax bill.
Retailers who begin collecting new taxes on Internet sales would not have to pay any back taxes under the plan, but that amnesty offer would disappear after 2006. Businesses generally are required to collect taxes only in states where they have a store or shipping center, but the laws get murkier
when companies treat their online and brick-and-mortar stores as separate businesses for tax purposes.
Last year, Illinois sued Barnes & Noble, Blockbuster, Gateway and dozens of other retailers, saying they cheated the state out of millions of dollars by not collecting taxes on Internet sales to Illinois residents. A year before that, California ordered Barnes & Noble to pay four months' back taxes, charging that the bookstore chain created a tax link between its online and offline businesses when its retail locations handed out coupons intended for use on the barnesandnoble.com Web site.
On the incentives side, the states' plan would free retailers from having to calculate dozens of different tax rates for the same item in one state. Instead, the states are required to come up with one tax rate per class of products per state. The plan also would allow retailers to file a single monthly tax return for each state instead of different tax forms for each local taxing district.
Online merchants also would be able to rely on an approved tax software vendor to calculate the taxes for each sale. Under the plan, such services would be free to sellers and the states would reimburse the tax software companies by letting them keep a percentage of the revenues they collect. In addition, any audits of a participating company would target the software vendor, not the seller.
One of the states' biggest allies is the telecommunications industry, which must deal with more than 15,218 different localities that levy taxes on telecommunications services, according to a 2002 study by the Multi State Tax Commission.
Debra Bierbaum, director of external tax policy for AT&T Corp., said the states' plan may not reduce the number of tax jurisdictions, but it would make it easier and less costly for the company to comply with them.
