Nothing Certain About Internet Sales Tax - TheStreet

Momentum may be building to force online retailers to collect taxes on Internet sales, but

Amazon.com

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and its fellow e-tailers don't need to worry just yet.

Before states can compel Amazon or online retailers to collect online taxes, they have to get the approval of Congress or the Supreme Court, neither of which is a sure thing. And even before Congress or the high court is likely to take up the issue, states have to simplify their sales tax laws, something that could prove daunting by itself.

Altogether, it is likely to be years before Amazon and other e-tailers collect taxes for states in which they don't have a physical presence.

State concerns about collecting taxes on remote sales have increased in recent years. Not only has e-commerce in particular grown steadily, but it has become a fat target for states struggling with revenue shortfalls -- a combined $50 billion in the coming year.

The states' hopes to tap some revenue from e-commerce got a boost earlier this month when a group of multistate retailers began collecting taxes on sales made through their catalog and Internet operations. The retailers, who declined to be named, said they wanted to encourage an effort by the states to simplify their sales taxes.

Technically, states can already tax so-called remote sales through use taxes, which consumers are required to pay to states when they buy something from out of state (e-tailers already collect sales taxes in states where they have physical operations). But few consumers know about the use tax, and states have not come up with an easy way to collect it.

Instead, many states have been itching to have catalog and Internet sellers collect sales tax on the more than $40 billion per year in Internet sales. The problem is that the Supreme Court has ruled that it would be an undue burden for sellers that have no physical presence in a particular state to have to collect taxes in that state.

Noting the 6,000-plus taxing jurisdictions nationwide, the Supreme Court decided that state sales tax laws are too complicated to force sellers to collect taxes on remote sales. The court, however, left the door open for Congress to revisit the issue.

Many states are hoping that Congress will do just that.

Simplifying Life

A group of 37 states plus the District of Columbia has been working for more than three years to come up with a joint plan to simplify their sales tax laws in an effort to sway Congress. Called the Streamlined Sales Tax Project, the effort resulted in a draft agreement last November.

That simplified tax agreement is now in the hands of state legislatures. Although many states have indicated that they will change their laws to come into compliance with the agreement, it may take a while for them to do so.

Before the agreement can go into effect, at least 10 states representing 20% of the total population have to enact it. The soonest that will happen is next January, said Scott Peterson, director of the business tax division of the South Dakota Department of Revenue and co-chairman of the Streamlined Sales Tax Project.

Even after the agreement legally takes effect, it could take "months" before the governing body, the universal registration form and other parts of the agreement are put into actual practice, Peterson said.

And that's if all goes well. Some business groups are already arguing that the simplification hasn't gone far enough. The Streamlined Sales Tax Project hasn't done anything about the proliferation of tax rates among and within states, for instance, said Mark Nebergall, president of the Software Finance and Tax Executives Council. Also, the states have yet to reach any kind of agreement on whether small sellers, such as those who sell on

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, will be required to collect taxes on remote sales.

"They're going to claim they've done it, but quite frankly, the business community isn't satisfied with the level of simplification," said Nebergall.

Not all companies agree with Nebergall, of course. Earlier this month, a group of seven to 10 retailers began collecting taxes on remote sales for 38 states and the District of Columbia, said John Coalson, an attorney with Alston & Bird, who represented the companies. The companies decided to collect the taxes voluntarily, in part to bolster the sales tax simplification project.

But the companies are by no means representative of e-commerce. Their total amount of online and catalog sales last year that would have been taxable under their new agreement was $450 million, Coalson said. That's a far cry from the $3 billion in sales that Amazon.com alone posted in 2002. Consumers spent a total of $43 billion online last year, excluding travel and auction purchases, ComScore Networks estimates.

Meanwhile, Coalson acknowledged that the companies had other motivations for agreeing to collect taxes. The companies he represented were the remote selling affiliates of established brick-and-mortar companies. Some of these companies wanted to be able to accept returns of goods purchased online at their physical stores or allow customers to order online and pick up goods in their stores. Allowing that to happen would probably mean that the companies' online units would have enough physical presence in a state to be liable for taxes.

Also, as part of the companies' agreement with the states, the states agreed to waive their liability for any past sales taxes they might have owed on remote sales.

And Then Things Get Difficult

Even if the simplification effort can get buy-in from the business community, it could still face a backlash from antitax groups. With many states already finding ways to balance their budgets, they are losing their rationale for needing to tax remote sales, argues Grover Norquist, president of the antitax group American for Tax Reform.

Further, the standardization of product definitions proposed by the agreement could well force states who sign on to it to tax products they haven't taxed in the past, Norquist warned. Norquist vowed to fight the states on the issue. "We are certainly redoubling our efforts," he said.

Assuming that a sufficient number of states pass the simplification project for it to take effect, the states will then need to appeal to Congress or the courts to allow them to force sellers to collect taxes on remote sales.

Taking the issue to the courts could be a risky proposition, said Walter Hellerstein, professor of taxation at the University of Georgia's law school. Even if the court could be convinced to look at the issue again, there's no guarantee that the states won't lose for a third time, Hellerstein said.

"This is not a case that the court is going to be eager to revisit," he said.

Meanwhile, Congress will probably wait to address the issues until more states sign on to the agreement than the minimum number needed for it to take effect, Hellerstein said. "This depends on the states moving en masse," Hellerstein said.

And once Congress takes up the issue, it's likely to face heavy opposition not only from Republicans and antitax lobbyists, but from e-commerce companies and tech-friendly lawmakers.

Those opposed to forcing e-tailers to collect taxes on e-commerce have argued that not only is such a scheme burdensome, but that it would slow the growth of e-commerce.

"When you raise the price of something, people tend to buy less of it than they otherwise would," said Patrick Byrne, chief executive officer of Overstock.com.

Issues of federalism could also come into play, said James Lucier, a Washington research analyst with Prudential Securities. Congress is likely to demand concessions from the states that they are unlikely to agree to, he warned.

"I just don't see Congress authorizing the

simplification agreement in a very clean way," Lucier said.

The daunting issues standing in the way of forcing companies such as Amazon to collect taxes on remote sales has even those paid to worry about such changes predicting that they will take a while to take place. Coalson, for instance, doesn't think the simplification agreement will be in place until "2004, if not 2005."