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End of Days for Tax-Free Net Sales

By: Jed Nottingham

Posted: 04/23/2007

WASHINGTON - According to a recent report on CNET, a powerful alliance of politicians, including key U.S. senators and the National Governors Association, is arguing that out-of-state retailers must be required to charge sales tax on purchases.

Companies like the Seattle-based Amazon are not required to collect sales tax on shipments to millions of customers in California.

For the past six years, officials from the Governors' Association have been pressing Congress to enact such a law. Arguments saying that reduced sales tax revenue threatens budgets for schools and police thus far have been unsuccessful.

What has changed, however, is the political landscape. Many believe a Democrat-controlled Congress is seen as more likely to agree to the idea than one controlled by Republicans.

"When you have a Democratic majority in Congress, that Congress will be more friendly to imposing new burdens on business if it means additional tax collection," said Steve DelBianco, executive director of NetChoice, which opposes the sales tax and counts as being among its members eBay, Yahoo, and the Electronic Retailing Association.

Another factor that could tip the scales in favor of the pro-sales-tax forces is a concept called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of the notorious convolutions of state tax laws. If that happens, they believe, it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers.

"Without any doubt, Congress will eventually approve legislation to give states that comply with the [agreement] mandatory collection authority for out-of-state transactions," said Neal Osten, federal affairs counsel for the National Conference of State Legislatures. "We expect that the legislation will be introduced shortly in this Congress."

It has been reported that 22 states have signed on to the project by enacting legislation to simplify their tax codes, Osten said. "We believe that with the system operational, with software and online collection available, sellers volunteering, and revenues being collected, Congress will consider the legislation and indeed approve it," he added.

Online purchases from sites like Amazon and eBay only seem to arrive tax-free. Legally speaking, however, a buyer is required to pay his or her own state's sales tax rate—the concept is called a "use tax"—and then voluntarily report the amount owed at tax time.

California residents, for instance, are burdened with a "sales and use tax" of at least 7.25 percent. State law is strict: If Californians travel to a state with a 5-percent tax and purchase something while there, the law requires them to cough up the 2.25-percent difference when they return. Online purchases are taxed, as well.

However, compliance is spotty at best. California's Board of Equalization estimates the state lost $1.34 billion in 2003 because residents didn' pay use taxes—and attributes $208 million of that to online purchases.

Lobbyists for sales tax say the national losses are far higher. A 2004 report from the National Governors Association and the National Conference of State Legislatures puts the figure at $15.5 billion in lost e-commerce revenue nationwide.

David Quam, director of federal relations for the National Governors Association, says mandatory sales tax collection will help retailers and tax collectors alike by simplifying the system. "It does mean the ability to collect the taxes that are due and owing. And, more importantly, it's a simplification of definitions and your tax base—making more sense out of the tax codes," he said. "Those are all net positives."

State governors have found allies among large retailers like Staples and Wal-Mart stores, which have physical presence virtually everywhere—and therefore already "must collect sales taxes on online shipments." They tend to support the Streamlined Sales Tax Project because it reduces their competitive disadvantage and simplifies their tax accounting.

What remains unclear is whether the big-business-and-state-politician coalition will be able to muster enough support in a Democratic Congress to enact a law making sales tax compliance mandatory. Osten added, "There will be members of both parties supporting the passage of this legislation."