States Close in on Internet Tax Collection
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The Internet sales tax issue may have reached the tipping point when 18 state tax collectors agreed upon an interstate set of sales tax rules. The tipping point, however, is still a long way from reality.
Meeting in Chicago last week, the Streamlined Sales Tax Project (SSTP) took its most significant step to date to implement the collection of sales taxes on online purchases, a potential $20 billion-a-year bonanza for cash-strapped states.
To bring those funds closer to state and local coffers, the SSTP officially admitted 18 states as members of the Streamlined Sales and Use Tax Agreement's (SSUTA) governing board. The interstate alliance plans to offer retailers free software to voluntarily collect sales taxes by October.
Under the SSUTA compact, the simplified sales tax system cannot take effect until at least 10 states representing 20 percent of the total population are in compliance with the agreement. The 18 states admitted to the SSUTA board represent 25.3 percent of the population of states.
Despite the landmark agreement, though, no one is under any legal obligation to collect online sales taxes until Congress approves the deal.
States have struggled for years to force catalogue and online retailers to collect sales taxes on purchases. In 1992, the U.S. Supreme Court said states could only require sellers that have a physical presence or "nexus" in the same state as the consumer to collect the so-called use taxes.
The court also ruled that buyers owe the tax, but the current patchwork of more than 7,500 taxing jurisdictions across the country is too complex and burdensome for online retailers to charge and collect sales taxes. To collect the taxes, the court ruled, states would need to first simplify the existing system.
To overturn the Supreme Court's decision, Congress has to certify the states have streamlined their sales taxes.
Led by the National Governors Association (NGA), states and local governments began the process five years ago of simplifying their sales taxes through the SSTP.
Two years ago, Senators Michael Enzi (R-Wyo.) and Byron Dorgan (D-N.D.) introduced a bill to require out-of-state retailers, including Internet businesses, to charge and collect sales taxes on transactions. The legislation had the effect of sanctioning the SSTP efforts.
"E-commerce has caused a significant change in consumer buying trends. More and more people are making purchases through remote businesses, such as online, catalog and phone-order," Enzi said when he introduced the bill. "This change has reduced sales tax revenues to states, cities and towns that rely on this form of revenue to provide essential community services such as education, law enforcement, and fire fighting."
Last week's Chicago accord brings congressional action back into focus, although no legislation has been introduced.