Some of the nation's largest retailers started voluntarily collecting taxes this week on all their online sales, a switch that could have broad implications for how commerce is conducted on the Internet.
Congress has demurred since the advent of online retailing on whether to allow states to require retailers to collect sales tax on online purchases, saying it wanted to allow the embryonic market to grow. But online sales have become big business: More than $73 billion worth of consumer goods were sold online last year, and financially strapped states are clamoring for sales tax revenue.
Under a deal with 38 states and the District, several big retailers that also have major stores around the country -- including Wal-Mart Stores Inc., Target Corp. and Toys R Us Inc. -- will have their online divisions collect sales tax.
Shoppers will pay based on the tax rates in effect where they live.
Wal-Mart and Toys R Us said they made the change because customers want to be able to return or exchange online purchases at the companies' stores. "We decided we would not be able to do that unless we charge sales tax for those online purchases," said Toys R Us spokeswoman Susan McLaughlin.
The stores also hope the change will allow more aggressive joint in-store and Internet promotion and other means of blending Internet and in-store shopping.
Although the change will often mean higher total prices compared with those charged by online-only retailers that do not collect sales tax, Wal-Mart and the others are betting that their decision will help an effort to allow states to compel sales tax collections. The retailers that signed on to the deal have online operations that account for only a small proportion of their sales but say their stores have been hurt by online competitors that do not collect sales tax.
Before the deal, the retailers' online sites collected sales tax only in states where they had physical operations. For example, although Wal-Mart has stores in all 50 states, its Walmart.com subsidiary has a physical presence in only nine states.
Cash-starved state governments have been pushing for Internet sales tax authority for several years, complaining that when auctions and business-to-business commerce are added to consumer sales, they are losing billions of dollars in tax revenue from online purchases. They also want to tax fees collected by Internet service providers.
"It's the first real step to modernize the system and bring it into the 21st century," said Frank Shafroth, director of state-federal relations for the National Governors Association.
Wal-Mart spokeswoman Cynthia Lin said collecting sales tax online is the right thing to do.
"Many states are struggling with tax-revenue shortages that affect funding for everything from schools to fire and rescue," she said. "This is our effort to help customers and the states they live in."
With their decision to have their online divisions collect taxes, the retailers also are hoping to undercut arguments from online-only shops that sales tax collection is too complicated to accomplish.
How much money the tax collection will raise is not known. Neither the stores that agreed to voluntarily collect the tax nor the states would say how many retailers are part of the agreement. Online sales account for only about 2 percent of total retail sales.
Representatives of online-only retailers, direct marketers and other technology companies were unmoved.
"This is a well-timed PR stunt," said H. Robert Wientzen, chief executive of the Direct Marketers Association. Wientzen said the retailers that agreed to collect sales tax have stores in most states -- which means they should be collecting taxes on online sales anyway -- and they are major corporations that have the computer resources to handle the nation's many tax rates.
"Somebody who's running an Internet retail operation out of a server in their basement isn't going to be able to handle" accounting for numerous sales tax rates, said Mark Nebergall, president of the Software Finance and Tax Executives Council. "The beauty of the Web is it gives small retailers access to global and national markets. Loading them up with tax administrative burdens like this would crush them."
Robert Comfort, vice president of tax policy for online retailer Amazon.com, said that although an effort by states to simplify tax rules is making progress, it still falls short.
The states have largely agreed on how to classify certain goods -- snack foods, for example, used to be taxed in some states and not in others -- but there has been less success in getting states and local jurisdictions to agree to a single sales tax rate, Comfort said.
Under the terms of the deal, the states agreed to absolve the stores of any liability for previously uncollected online sales taxes that they might have had to pay because they have operations in so many states.
The retailers attempted to get around those rules by incorporating their online arms separately and putting their facilities in only a few places.
Walmart.com and other retailers that changed their tax-collection rules declined to say whether they were parties to the amnesty agreement.
Other retailers also have agreed to the deal, but Atlanta lawyer John Coalson, who represented the retailers in the negotiations with the states, declined to say which ones accepted the plan. Since not all states agreed to the deal, revealing the retailers' names would let the states that rejected the agreement chase down those companies for back taxes, he said.
"If we disclose who these companies are, it's like putting a target on their back," he said.
Arizona, California and South Carolina are not parties to the deal, and four other states have not yet signed on. Five states have no sales tax.
Amazon.com operates the online stores of many of the retailers that have started collecting sales tax. Comfort said Amazon insisted that all the tax data from the various jurisdictions around the country be provided by the retailers so Amazon would not have to do that computer-programming work.
Thus far, Congress has been unwilling to give the states remote taxing authority, which was prohibited by a 1992 Supreme Court decision. It is unclear whether this week's developments will change that.
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.
So far this year, several members of Congress have introduced bills to extend a moratorium on taxing Internet access fees without recognizing the states' efforts. A number of the states' strongest allies in Congress, including Sen. Byron L. Dorgan (D-N.D.) and Rep. Ernest J. Istook Jr. (R-Okla.), have yet to offer legislative support, but Shafroth said legislation is in the works.
Krebs is a reporter for washingtonpost.com.