Net Sales Tax Looms Larger

The days of American consumers avoiding sales tax by making their purchases online are numbered, if testimony given before a hearing of the Streamlined Sales Tax Project (SSTP) on Thursday is any indication.

Although the stated purpose of the SSTP is to “simplify and modernize sales and use tax administration,” representatives from the National Retail Federation (NRF) and the Electronic Commerce Association (ECA) told the E-Commerce Times that their organizations believe that all online sales will eventually be subject to sales tax.

“We hope there is a level playing field within 18 to 24 months,” NRF vice president Maureen Riehl said.

Net Sales Not Exempt

Although many consumers and e-tailers believe that online purchases are exempt from all taxation, that is not actually the case. At present, remote sellers are only required to collect sales tax if they have a physical presence in the purchaser’s state. Requiring e-tailers to collect tax on all purchases would require congressional action.

If no sales tax is collected on the purchase, however, consumers are required to report their purchases to their state revenue department and pay a use tax equal to the amount of sales tax that would have been collected if the purchase had taken place in their home state.

Some states make little effort to collect use taxes, while others request that out-of-state merchants report purchases made to state residents. Once states receive such a report, they notify residents that they are liable for the use tax.

A number of states require residents to report and remit use taxes when they file their income taxes. Charles Collins, director of the Sales and Use Tax Division of the North Carolina Department of Revenue, said at the hearing that his state’s use tax collections jumped to $4.3 million (US$) — up from a range of $250,000 to $400,000 in years past — since the introduction of a line item for use tax to its income tax form in 1999.

Unfair Competition

Representatives from both traditional and brick-and-click stores stepped forward at the hearing.

Dave Ziegler, vice president of a chain of Ace Hardware stores in the Chicago area, testified that e-tailers that do not collect sales tax enjoy a competitive advantage. According to Ziegler, the average online hardware purchase is $80, while the average offline purchase is $13.

Also in favor of taxing Net sales was Robert Molloy, vice president and assistant general counsel of brick-and-click office supply chain Staples. Molloy echoed the general rallying cry, noting that not requiring all e-tailers to collect sales tax gives Internet pure-plays an advantage over their multi-channel counterparts.

Brick-and-click operations must collect tax on Net sales made in all states where they have a physical presence, while Internet pure-plays are only required to collect sales tax in their home state.

The Missing Dot-Coms

Noticeably absent from the hearing’s 19-person witness list were representatives from the Internet pure-plays.

When asked why e-tailers were not coming forward to voice their opinions, the ECA’s Larry Good told the E-Commerce Times that “dot-coms haven’t focused on [the issue].” He added that many e-tailers think the proposal will “get defeated or go away.”

With the notable exception of Internet bellwether Amazon — which, according to Riehl, has “decided not to weigh in opposing NRF’s efforts” — the majority of the NRF’s members have supported the group’s position on the tax issue.

Technologically Possible

E-tailers have balked at collecting sales tax because they claim it would be excessively burdensome to collect and remit taxes to thousands of different taxing bodies.

However, witnesses pointed out that developing a database that could calculate the correct sales tax based on the purchaser’s zip code is possible. Molloy pointed out that Staples is already employing comparable technology.