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A Taxing Internet Question Unresolved
by Winter Casey
The long-running effort to streamline sales-tax systems so states can collect taxes on Internet and remote sales may be reaching a zenith at the federal level.
Numerous states already have taken steps to streamline their systems, but action in Congress eventually is needed before taxes actually can be collected across state lines. Stephen Kranz of the Council on State Taxation, who is also a board member of the Business Advisory Council, said the congressional landscape has changed and now could be more favorable toward legislation on the subject.
"This is the year, if it is going to happen" Kranz said. "Hopefully the lawmakers will have the bill finalized and introduced in the near future."
The States Of Play
The issue dates back to the 1992 Supreme Court decision Quill v. North Dakota that said companies do not have to collect sales taxes unless they have a physical facility, or "nexus," in a consumer's state. Currently, consumers who buy products online are supposed to pay sales taxes within their states and "use taxes" if they purchase goods online from out-of-state firms, but those taxes often go unpaid.
The effort to create a common sales-tax system -- known as the Streamlined Sales Tax Project, or SSTP -- aims to remedy that concern. The project seeks to "develop measures to design, test and implement a sales and use tax system that radically simplifies sales and use taxes." Many states have enacted legislation to implement SSTP, which was adopted in 2002.
Currently 15 states are full members of the project, and six states are associate members. Associate members either have passed the necessary measures to fully join but they have not taken effect yet or they have passed most but not all of the required legislation.
On March 22, Washington Gov. Christine Gregoire signed legislation that conforms the state's law to the SSTP agreement. The measure, which takes effect July 1, 2008, "encourages Internet and mail-order catalog businesses that are not physically located in Washington to begin collecting and remitting sales taxes by reducing the administrative burden of collection and granting amnesty for any tax they should have collected in the past," the Washington Department of Revenue said in a statement.
Also in March, The Idaho Statesman reported that Idaho's Senate endorsed a plan to require more businesses to charge sales taxes when they sell goods online. Kranz added that legislatures in Hawaii, Massachusetts and Wisconsin are moving SSTP bills, and measures have been introduced in Connecticut and Illinois.
More than 1,000 companies that sell products in multiple states have voluntarily agreed to begin collecting and distributing sales taxes to any state that agrees to become a member of the project, according to the Washington Department of Revenue.
Kranz said that from a business standpoint, the country's sales-tax system generally is a nightmare, and it would be beneficial for states to have a more simplified tax regime. SSTP would eliminate administrative burdens and audit risks for businesses, he said.
The Landscape In Congress
Sen. Michael Enzi, R-Wyo., plans to re-introduce legislation on the subject this Congress, according to Coy Knobel, Enzi's press secretary. Enzi is working on the bill with Sen. Byron Dorgan, D-N.D., as he has in the past.
Dorgan spokesman Barry Piatt confirmed that the lawmaker is working with Enzi. "They are speaking with various stakeholders to see if they can come up with something that works for everyone," said Piatt, who noted that the legislation is still in the discussion stage.
Legislation authored by Enzi in the 109th Congress would have given all retailers, including online commerce sites, the same responsibility to collect sales taxes. In the past, Enzi has said it is unfair that remote Internet sellers have an advantage over small businesses because they do not have to collect taxes.
"As more states continue passing laws securing the collection of this tax and as the amount of revenue [from Internet sales] being lost by states and municipalities increases, there will naturally be more emphasis on and support for Sen. Enzi's bill," Knobel said. "When that support will hit critical mass and we will be able to pass the bill is hard to determine," but Enzi will continue to pay close attention to the issue, he said.
Mark Nebergall, president of the Software Finance and Tax Executives Council, said an attempt could be made to attach language from Enzi and Dorgan to legislation that would make the ban on taxing Internet access permanent. That ban is set to expire in November.
There will be opposition to national legislation "on the ground that SSTP does not present sufficient simplification to justify repeal of the Quill rule for member states," Nebergall said.
A Recipe For 'Chaos'?
Past efforts to tie the sales-tax issue to the moratorium on other Internet-related taxes have failed, and that opposition still exists this year.
Sen. Ron Wyden, D-Ore., "firmly believes that keeping the Internet free of arbitrary and discriminatory taxation needs to be a top priority," Wyden spokeswoman Melissa Merz said. "Bogging this down with controversial issues like the streamlined sales tax hinders the Internet progressing on the Internet tax moratorium."
George Isaacson, tax counsel at the Direct Marketing Association, also opposes the bid to tax online sales. "'Taxation without borders' results in cost, complexity, confusion, and conflicts," Isaacson said. Forcing online sellers to collect sales taxes for all state and local taxing jurisdictions conflicts with the U.S. Constitution's clause that gives Congress oversight of interstate commerce and is flawed, he told a Senate subcommittee in 2006.
He said federalism does not work "when a state (or locality) attempts to export its tax system across state borders. At that point, the state is visiting its experiment on businesses that have no connection -- or nexus -- with the taxing state."
The marketing group said SSTP creates a barrier for new entrepreneurs and hinders the growth of medium-sized businesses. "Such an arrangement is not only chaotic as a matter of both tax administration and compliance ... but the out-of-state companies have no way to influence the very state tax burdens that are imposed on them," Isaacson added in a statement from the group.
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