States Move Forward on Internet Sales Tax

By Brian Krebs Staff Writer
Friday, July 1, 2005; 4:02 PM

Tax officials, state lawmakers and industry representatives agreed Thursday to establish an 18-state network for collecting taxes on Internet sales, a compact they hope will encourage online retailers and Congress to endorse a mandatory national program.

Meeting in Chicago under the auspices of the Streamlined Sales Tax Project, the officials agreed that 11 states will oversee the project and outlined incentives to encourage retailers to participate. Forty states have been negotiating since 2000 to create a framework for collecting sales taxes on all remote transactions, whether through regular mail or online.

"The vote is a culmination of over five years of hard work by states, local governments and businesses interested in seeing the complexity in sales tax [reduced]," said Stephen Kranz, tax counsel for the Council on State Taxation, an industry trade association.

Starting Oct. 1, software vendors contracted by the Streamlined Sales Tax Project will begin providing free tax collection and remittance software and services to online merchants who voluntarily agree to collect taxes on all online sales on behalf of the 18 participating states.

Under the states' plan, Internet retailers that agree to collect and remit taxes will do so for online sales originating in any of 11 states that have amended their state laws to fully comply with standards developed by the sales tax project. In the other seven states, the Internet sales tax collection would be optional until their tax codes are brought into full compliance. In both cases, any taxes the retailer collected would be based on the rates in effect where the buyer lives, and the retailers would be compensated for the cost of collecting and remitting that revenue to the states.

As an incentive, the states will offer a one-year amnesty for e-commerce companies that may owe taxes on past online sales to any of the participating states. The amnesty offer could prove attractive for several major retailers that are currently involved in legal disputes over whether they owe taxes on Internet sales.

In a decision handed down May 31, a California state appeals court ordered, the online division of the bookseller Borders Group, to pay $167,000 in back taxes to the state because the company allowed customers who bought books online to return them at the company's brick-and-mortar stores.

In an ongoing case that began in 2003, Illinois sued Barnes and Noble, Blockbuster, Gateway and several other retailers, alleging that they failed to pay millions of dollars in taxes on sales made to state residents. In December 2004, several retailers -- Wal-Mart Stores Inc., and its affiliate,, Inc.; Target Corporation and its affiliate, Target.Direct, LLC; and Office Depot Inc. -- settled those lawsuits, paying Illinois a total of $2.4 million. The state's case against Gateway and other major retailers is pending.

The states supporting the online sales tax effort believe a successful run of their voluntary program may encourage Congress to pass legislation to overturn a 1992 Supreme Court ruling. In that decision, the justices said mail-order merchants, and, by extension, online retailers, did not need to collect taxes for sales into states where they did not have a physical presence, such as a store or shipping center. The high court reasoned that subjecting out of state merchants to such a myriad of disparate tax laws would place an undue burden on interstate commerce.

At stake for the states are potential billions of dollars a year in revenue that currently go uncollected. A study released in July 2004 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 from untaxed Internet sales. Total online retail spending last year was $66.5 billion, according to comScore Networks, a Reston, Va.-based research firm.

In their vote Thursday, the Streamlined Sales Tax Project members agreed that the governing board of full members would consist of Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, North Carolina, Nebraska, Oklahoma, South Dakota and West Virginia. In a last-minute legislative session late Thursday evening, New Jersey also enacted legislation to bring the state into compliance with the project's guidelines; it will become a full member Oct. 1.

Associate member states are Arkansas, North Dakota, Ohio, Tennessee, Utah and Wyoming.

Rich Prem, director of global indirect taxation for, called Thursday's agreement "a great first step," but said the states' plan lacks a meaningful mechanism for compensating for large Internet retailers for the costs of collecting and remitting sales taxes. Prem also noted that the states have not agreed yet on how to treat digital downloads of books, music and movies.

Some states that have participated in the Streamlined Sales Tax Project have indicated they are not willing to undertake the politically difficult task of tax simplification until Congress signals its support. Maryland officials have said they will not take any further simplification steps until Congress approves the states' plan. The District of Columbia and Virginia governments support the plan but have not yet taken concrete steps to bring their tax laws in line with other members.

Streamlined Sales Tax Project officials say supporters in Congress will reintroduce the measure again this year, but it's unclear whether the House or Senate will make it a priority.

Bills were introduced in 2000 and 2003 but failed to make it to either the House or Senate floors for a vote.

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