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Online taxes: It's inevitable
An Internet sales tax is an idea whose time has come. Here's why.
February 12, 2003: 1:35 PM EST
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - When the issue of online taxation first arose in 1998 (the year Congress passed a five-year moratorium), the Internet sector protested that it couldn't shoulder the taxation burden; it was too young an industry and needed protection.

What a difference five years makes. Now, online retailers are stepping up and signing on, agreeing -- if only in principle -- to collect taxes on Internet sales.

Last week, an online tax proposal crafted by the National Governors' Alliance went into effect. Its quid pro quo: If Web retailers start collecting sales taxes, the states won't go after them for back taxes on goods sold in the past.

A handful of retailers are already complying, including,,, Toys "R" Us, and, while others such as (AMZN: up $0.17 to $20.95, Research, Estimates) and are looking into the proposal.

Turns out that taxes in the online sector -- like in every other business sector -- are inevitable. State and local governments are now so fiscally strapped that they can't afford to turn away any new opportunity to collect revenue.

But the move actually makes sense for online retailers, and more should sign on. And tech investors should voice their concerns if retailers in their portfolios aren't on top of the change. We'll get into why in a second, but first, a bit of tax policy background -- bear with me.

This train is coming

The current system of sales tax jurisdictions and rates is so complicated that, for a national company, collecting and administering sales taxes is nearly impossible.

There are more than 7,500 different sales tax codes and regulations in the United States. Essentially, retailers are required to collect taxes only in states where they operate a physical presence, or "nexus."

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Because the crisscross of codes is so complicated, paying taxes on out-of-state goods has been the responsibility of citizens -- not companies. But collection rarely has been enforced, and states believe that if they can simplify the tax code so that businesses can take on the responsibility of collecting interstate taxes, a potentially lucrative revenue stream will start to flow.

In November the NGA took a first step toward this goal, agreeing to begin work on a simplified sales tax code for the Internet. Thirty-eight states are part of the proposal. Though no proposal yet exists in final form, the organization needed to get at least a few retailers on board to help it push through the next phase: convincing state legislatures and Congress that a simplified sales tax strategy can work to bring in much-needed additional revenue.

Jupiter Research recently published a report arguing that collecting taxes won't drastically affect online retailers' customer base. Some 82 percent of survey respondents either didn't know they could avoid paying a sales tax online, or were aware but said it didn't play a role in how they chose between retailers.

Jupiter analyst Juliana Deeks stresses that the opportunity for companies to integrate their operations across multiple channels -- allowing customers to order an item online and pick it up in a store, for example -- outweighs the advantages of dodging sales taxes.

"A lot of business units are kept separate specifically to avoid sales taxes," Deeks said. "Retailers should work toward multichannel integration." That integration could actually lead to sales growth -- another reason investors should promote the tax.

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Gartner G2's Mike McGuire says that once the codes are simplified, the only real sales tax issues facing online retailers will be back-office integration concerns. There aren't necessarily simple solutions to such issues, however, and investors should find out about companies' plans and preparations for collecting sales taxes -- now.

"The real importance is making sure the businesses understand the situation. In two or three years, [collecting taxes] will be forced and mandated," McGuire said. "If this isn't something that's coming up at the investors meeting, you need to ask them the question again. This isn't going to go away."

Eric Hellweg is a contributing writer at Business 2.0.

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