States Renew Online Sales Tax Push

Reviving an issue that has dogged the e-commerce industry since its earliest days, at least 18 states are stepping up efforts to collect sales taxes from online merchants, likely meaning more Web shoppers will be paying at least a little extra during the key holiday season.

As part of a push to let merchants — primarily those with brick-and-mortar stores as well as Web shops — who have failed to pay taxes in the past move into compliance, the Streamlined Sales Tax program is offering a year of amnesty to those companies.

Banding Together

In exchange, companies will be expected to report and pay sales taxes to some 13 states that have been accepted into the program by putting systems in place to track and receive the payments. Payments will be entirely voluntary in another 5 states who have yet to be accepted as Streamlined states.

The Streamlined Sales Tax program is also offering to help hire third-party service providers to handle tax billing and has created software programs to automatically detect taxable purchases. Many see it as a prelude to a widespread effort to force online retailers to pay taxes, with the states possibly banding together for legal action if necessary.

The collection is slated to get under way on Oct. 1, which is also often seen as the unofficial early start to the most important stretch for e-tailers — the fourth quarter and the holiday shopping season.

Most analysts expect the e-commerce industry to show no ill-effects from the stepped-up tax efforts, but some say smaller merchants are hurt because of the extra burden of tracking and reporting taxable sales.

States have long argued that they are losing up to US$15 billion annually in sales tax that could be collected from online buys — money that many states desperately need to fund schools, public safety and other programs cut in recent years.

Towing the Line

The debate over online sales tax has raged since e-commerce began, with wide disagreement on whether implementing broad-based online sales tax would dampen consumer enthusiasm for buying online. In fact, many argued against such a tax on the grounds that putting one in place would stifle e-commerce while it was still in its formative, growth stage.

For years, a 1992 Supreme Court ruling has been the touchstone for the industry. That ruling said consumers were responsible for paying sales tax for Web purchase if the merchant they were buying from had a “nexus” or physical presence in the customers’ state. That has been interpreted to mean both stores and facilities such as call centers.

But many merchants have not followed the letter of that decision and many states have been hard-pressed to do much about it, with the enforcement of sales tax laws requiring enormous resources that many lack.

The Streamlined Sales Tax program, which some 40 states have helped draft, is meant to offer a carrot to retailers through the year-long amnesty program that eliminates the possibility of back taxes being collected.

Those back taxes could be substantial and the risk of having to pay them was brought into sharp relief earlier this year when a California court ruled that Borders was responsible for paying back taxes on online sales.

The case, known as Borders Online v. the State Board of Equalization, dealt specifically with sales from Borders to California residents during 1998 and 1999. The court cleared the way for the state to collect some $1.5 million worth of taxes that should have been collected between 1998 and 1999.

Major Retailers Balk

Some major online retailers, including Amazon.com, have said they would not volunteer to collect and pay taxes to states until a better system is in place for establishing what sales require tax payments. The Direct Marketing Association has also come out against the streamlining effort, saying it has not addressed some of the complexities involved.

Complexity is certainly an issue and one reason for the push to streamline. For instance, some states exempt items such as clothing from sales tax, unless those items are over a certain price threshold, at which point they become luxury items. And not all states collect either the same tax levy or tax the same set of items. In order to overcome those hurdles, states must draft rules that match the rules in other states in order to become part of the Streamlined Sales Tax coalition.

Forrester Research analyst Carrie Johnson told the E-Commerce Times that consumer behavior and past studies seem to suggest online taxes would likely not stall the growth of e-commerce, but that some shoppers do turn to the Web for the ability to avoid paying them.

“Shoppers would prefer not to pay taxes and it might affect some purchases,” Johnson said. “The number one reason people shop online is convenience and the ability to comparison shop easily. An added 5 percent sales tax on the bottom line doesn’t dramatically alter the convenience aspect of buying online.”