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Online Merchants Likely To Remain In States' Crosshairs

States struggling to close growing budget deficits are likely to take greater aim at online sales firms that do not collect sales taxes, an official with the Direct Marketing Association said Thursday.

Legislation signed last week by Illinois Gov. Pat Quinn is just one of many attempts by states to deal with a loophole left by a 1992 Supreme Court decision that found companies are not required to collect sales taxes from customers in states where the firms do not have a physical presence. While the ruling applied at the time to catalog sales, online retailers like have used the loophole to their advantage.

Since then, states have complained that they are losing billions of dollars a year in sales taxes from online transactions. At the same time, brick-and-mortar retailers argue that they are being placed at a competitive disadvantage.

While states have been pushing Congress to close this loophole, they also have been taking matters into t heir own hands. The Illinois bill, which is similar to a New York state law that has been challenged in court by Amazon, would require online retailers who contract with an affiliate in Illinois to collect sales taxes on customer purchases there.

"States have targeted this industry. Over the next 12 to 18 months, we will get a clearer definition of where the battle lines are drawn," George Isaacson, tax counsel for the Direct Marketing Association, said during a policy conference sponsored by the group. The DMA has challenged a Colorado law that would require online retailers and catalog companies to turn over the names and purchasing information of their customers to state revenue officials. A federal district court recently issued a preliminary injunction barring enforcement of the law.

Meanwhile, states have found some allies in Congress. Senate Majority Whip Dick Durbin, D-Ill., is expected to introduce a bill possibly as soon as this week aimed at giving states authority to mandate that online and catalog firms collect sales taxes from customers in states where those companies do not have a physical presence.

Isaacson and other critics of such efforts say their concern with such proposals is with the burden of having to comply with the different sales tax regimes of the more than 7,500 state and local taxing jurisdictions throughout the country.

Scott Peterson, executive director of the Streamlined Sales Tax Governing Board, agreed with Isaacson and other critics that the current sales tax system is far too complicated. His group has been working with about two dozen states to try to simplify their sales tax regimes, which would make it easier for firms to collect taxes on remote sales. Noting that e-commerce is "the future," Peterson said he is trying to work with online retailers to improve the current sales tax regime.

"We have from the very beginning been dependent on multistate retailers to tell us what" we are doing wrong, Peterson said in an interview after the conference.

But he added that some retailers themselves are the ones pushing states like Illinois and New York to pass laws like the online affiliate measure enacted in Illinois last week. The Illinois Retail Merchants Association endorsed that state's affiliate tax law, describing it in a statement as "restoring fairness."

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