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States Getting Ready to Tax Internet Sales

By Pete Shuler · March 15th, 2001 · Statehouse
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Zipping around the Internet and plucking products from the collectively massive inventory offered by thousands of retailers around the world is easier, faster and usually cheaper than fighting through traffic and crowds, only to be disappointed by the mall's scant offerings.

It is no surprise then that on-line shopping is booming. The U.S. Department of Commerce reported Americans purchased nearly $8.7 billion of goods over the Web during the last quarter of 2000, an increase of more than 67 percent over the same quarter in 1999 and $700 million more than Internet retail sales for all of 1998.

One of the attractions of shopping online is that, unless you order from a company in your state, no sales tax is assessed. This is due to a 1967 ruling, National Bellas Hess, Inc. v. Illinois, in which the U.S. Supreme Court decided mail order companies, the paper-based precursor of Internet retailers, could not possibly keep up with the variety and complexity of dozens of state tax codes. According to the court, the states' demand that these retailers collect and remit sales tax placed an unconstitutional burden on interstate commerce. In 1992 the Court reaffirmed this decision, but in doing so stressed that states have a right to tax items purchased within their boundaries, no matter the source of those products, if they can do so without impeding commerce.

The volume of tax revenue lost to mail order purchases never bothered politicians enough to spur them into creating a hassle-free way of squeezing revenue from these cross-border transactions.

But the volume of sales flowing through the Web has unequivocally grabbed the unwavering, dollar-signs-for-pupils attention of legislators in every state that taxes retail sales. With the Internet just a few years out of the gates and with millions of people yet to be logged on, Web sales have already blossomed to account for one percent of all consumer purchases.

As the slowing economy chokes gushing state revenue streams to a trickle, state officials are, after 30 years of general inactivity on this front, focusing their energy and resources on tapping into the flow of currency through the Internet. In 1998 the National Governors Association (NGA) set out to unify and simplify the hodgepodge of state tax codes, regulations and administrative practices so that collecting state sales tax no longer burdens retailers.

To do this, the 30 states involved in the effort (nine additional states are acting as observers) must somehow merge millions of pages of sales tax rules and law into one set of flexible but uniformly applicable rules. Under the NGA's plan, each state will control which products purchased by their citizens are taxed and at what rate, but each will be limited to only one sales tax rate and each must pare down and clarify their definitions of taxable and exempt goods and services. The governors also hope to streamline the audit and record keeping requirements they impose upon retailers.

States will continue to miss out on the Internet gold rush if they do not gain the blessing of the Supreme Court by simplifying the assessment and collection of sales taxes. Uniform, easily understood tax codes and definitions will certainly please the court, and the NGA has also proposed using a centralized electronic registration system to help retailers keep track of tax law and to help the states keep track of retail activity. Third-party companies might remove the rest of the burden by tackling paperwork, record keeping and administrative functions.

Legislation intended to codify the NGA's proposals is in the works in 21 states. Retail companies and industry groups such as the National Retail Federation, which represents most of the large retailers who would be affected by these changes, have voiced support. With this state and industry support, the NGA plans to ask the federal government to pass legislation that would obligate retailers with sales in excess of some still undetermined amount to collect state sales tax. Federal legislation would settle the constitutional question efficiently by consolidating legal challenges from consumers and consumer groups. If, as the NGA hopes, such challenges are rebuffed by the Supreme Court, Internet shopping will still be quick and easy, but not tax-free.

 
 
 
 

 

 
 
 
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