The Net’s New Fighting Words: Sales Tax


Depending on whom you listen to, sales taxes on e-commerce transactions are:

  1. Natural and inevitable, and will create a level playing field for all retailers.
  2. Likely to put a big crimp in online sales and be devastating to small online businesses.
  3. Be so complex as to be unworkable without employing an army of accountants.

(What do you think? Take our poll or just click here to check out the results.)

There is a lot of sound and fury on this issue and recent reports of sales tax collections being started by some large Internet retailers like Wal-Mart and Target stirred the pot yet again.


But the Internet’s biggest retailer, sales giant Amazon.com is taking it all in stride.


“People shop online for selection and convenience, it has nothing to do with sales taxes,” Amazon spokesman Bill Curry told InternetNews.com.


“We are collecting sales taxes where our partners (like Target) request it, but we (Amazon.com itself) are not collecting sales tax for all the reasons we never have – the administrative and financial burden of trying to put millions of products into the tax rates and definitions and locations of 7,600 different sales tax jurisdictions in the United States,” Curry said.


However, that’s a burden that state governments are trying hard to ease in their efforts to make sure that sales taxes on goods sold online don’t just evaporate.


“The streamlined sales and use tax agreement that was ratified in November 2002 simplifies sales tax collection and definitions and requires states to have one base for taxes,” said Neal Osten, director for telecommunications and interstate commerce at the National Conference of State Legislatures.


That agreement, known as the Streamlined Sales Tax Project (SSTP), now goes to each state, which must enact legislation to bring their state and local sales tax laws into conformity.


The goal here, Osten told InternetNews.com, is to “reduce the number of sales tax rates per state, and make it so that technology (software) can deal with sales taxes for products sold online.”


The streamlined sales tax would establish uniform definitions for taxable goods, solving some of those vexing questions such as whether orange juice is a fruit or a drink (in some states one is taxed, the other is not) and whether a handkerchief is an article of clothing or something else altogether.


It would require participating states and local governments to have only one statewide tax rate for each type of product effective by 2006.


What happened this week is that a number of major retailers that have a physical presence in a lot of states across the country agreed to begin collecting sales taxes on goods sold online.


Did you guys put a gun to their heads, Osten was asked. “No,” he said. “Negotiations were between the companies and state government tax administrators.”


“The companies that volunteered (to collect sales taxes) have already been supporting this effort,” he said. “These are the online subsidiaries of companies that have physical presence in lots of states, and they were nervous that federal or state courts could step in” to enforce demands for payment of back taxes to one government taxing body or another.


Currently, sales and use taxes are owed on all online transactions, but states are prohibited from requiring remote sellers to collect and remit those levies.


A 1992 U.S. Supreme Court decision said states can only require sellers that have a physical presence or “nexus” in the same state as the consumer to collect sales or use taxes. And it’s obvious that there’s a Wal-Mart just about everywhere, for example.


That nexus thing is why Seattle-based pure-play Amazon.com, for instance, collects and pays sales taxes on goods sold to residents of the state of Washington, but not elsewhere.


“We have been an active participant in the steamlined sales tax project, but the political differences among the states are such that they ducked a lot of the difficult problems,” said Amazon’s Curry.


Nevertheless, efforts are ongoing, and they include the planned introduction of federal legislation and the ongoing development of software to handle collection and apportionment of sales taxes on goods sold via e-commerce.

— Want the details on how a tax plan would be implemented? More on Page 2.

Osten of the National Conference of State Legislatures said that the legislation “would provide a mechanism for streamlined sales tax collection” and in essence would overturn the 1992 high court decision, and give states the authority to require sellers to collect sales taxes. He said the court decision itself encouraged Congress to become involved.


And the software needed to do this?


“We anticipate we may have to provide the software,” Osten said. “We are working with companies like JC Penney, Sears, etc., funding with them a joint study on the costs … companies like Amazon would be reimbursed for costs associated with obtaining and implementing the software.”


“The states must realize that we have depended on vendors to foot the expense for tax collection,” he said, adding that companies like Hewlett-Packard , Vertex, Pitney Bowes, and others are developing the technology, which will be certified by the states.


“Companies that use certified software for sales tax collection will be held harmless” for any errors in collection, Osten said. “By reducing the number of tax rates per state, it makes it so that technology can deal with sales taxes for products sold online.”

And the Little Guy?
What about small and medium-size businesses (SMB)? One of the big concerns of organizations like the Direct Marketing Association is that the imposition of sales taxes online will seriously and negatively affect overall sales at the SMB level.


“The state government process is called simplification, but it’s not — there is no magic software out there that does this,” said Lou Mastria, director of public and international affairs for the DMA. “It cannot keep up with the vagaries of the system — sales tax rates can be changed at any time at any taxing district.”


“The last time the states took up this battle was ’96 or ’97 — back then states were flush with cash. This is not about curing state deficits, he said. “States want their hands on this revenue as a matter of principle.”


And Mastria contends that there already is a level playing field between real world and online retail businesses, because online companies have to pay for – or get their customers to pay for — shipping and handling costs, which he said average 8 to 10 percent of a purchase price.


“This is a very complex tax system, and to ask anyone who doesn’t have a major accounting firm doing their books to pay sales taxes in all these venues … it’s very difficult,” Mastria said.


However, the state governments do indeed recognize that most small businesses online can’t afford to hire an army of accountants. Osten said that what’s being considered is a provision in sales tax collection regulations that would exempt businesses with less than a certain amount of revenue – say $5 million – from having to collect sales taxes in states where they have no physical presence.


What about a company like eBay? That $5-million floor would certainly be enough to avoid tax collection requirements for most small sellers.


eBay spokesman Kevin Pursglove said that eBay itself is not a seller of items over the Internet. “The transactions (and the tax responsibility) occurs between eBay members.”


“eBay believes current tax laws are appropriate for the great majority of transactions that occur on the Internet,” Pursglove told InternetNews.com. “An increasing number of eBay users are business proprietors who have established successful off-line businesses and are fully aware of their tax obligations. We believe they conduct their online transactions in the same manner they handle their off-line transactions. In fact, you can scan through the eBay listings and find many sellers who already include language addressing the sales tax issue.”


Online auction expert Ina Steiner at AuctionBytes.com agrees. “eBay sellers already should be collecting any sales tax as required by law. eBay transactions are between the buyer and the seller, and eBay has successfully defended their ‘venue only’ status in court several times.”

“The only way this may eventually affect eBay is if government tax agencies force eBay to provide sales information about their sellers,” she said. “I foresee this as being immensely complicated – eBay doesn’t necessarily know a transaction was even completed successfully, since deadbeat bidding is a huge problem on the site.”


That would appear to be unlikely, at least for now. But things do get complicated. Coimpanies like Sears, for instance, not only have an online presence of their own, but also sell on eBay.


One thing is clear, though — sales tax collection efforts on e-commerce transactions are here to stay.


“We anticipate a lot of the complexity goes away once the states have complied with the streamlined agreement,” said Osten. “Once definitions are the same from state to state, there will be 45 taxing jurisdictions” (the states that currently collect sales taxes) … and “businesses will simply make one payment to each state every month.”

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