Small Business
States angle for e-taxes
December 22, 2000: 12:03 p.m. ET

Draft legislation could lay groundwork for tax on 'Net sales, other remote deals
By Staff Writer Steve Bills
graphic graphic
NEW YORK (CNNfn) - State governments took a key step Friday to set common rules on sales taxes, a move that they hope will enable them eventually to capture sales taxes on Internet transactions and other remote sales.

Representatives from state governments voted 26-0 to approve draft legislation that would become a model for individual state laws. Leaders hope the first half-dozen state legislatures will adopt the strategy next year, with the phase-in of the new system beginning in 2006.

The action Friday "didn't change any laws. It did move forward to the legislatures" a proposal that they can consider next year, cautioned Charles Collins, a North Carolina tax official who is co-chair of the Streamlined Sales Tax Project, an ad-hoc group that has spearheaded the effort.

Tax streamlining was not designed specifically to tax e-commerce but, Collins said, "The Internet has brought the issue much more to the forefront."

The Tarheel State loses far more revenue to out-of-state mail order sales than it does to online transactions, Collins added, but with the rapid growth of Web business, "it has become more urgent."

A patchwork of jurisdictions

As the system exists today, it is a crazy quilt, a patchwork of 7,500 individual taxing jurisdictions across the United States, each with its own rules, paperwork and procedures. Forty-five states and the District of Columbia have sales taxes of some kind.

In part because of the sheer complexity of the system, the U.S. Supreme Court ruled in 1967 that a merchant could not be required to collect taxes on out-of-state sales unless the company had at least some minimum presence, a "nexus," in the other state.

  If a product is mailed to me here in Wisconsin, then Wisconsin would get the tax.  
  Diane Hardt
Wisconsin tax administrator
The result is a pricing advantage to distant merchants, a competitive edge that may amount to 5 percent or more on the cost of products. Consumers are supposed to pay "use taxes" on such out-of-state purchases, but few do.

Where are such taxes payable, anyway? If a commuter in New York calls an 800 number in Virginia for a product that is shipped from a South Carolina warehouse to the buyer's home in New Jersey, what government gets the tax revenue?

The draft law provides an answer, said Diane Hardt, the other co-chair of the steering committee and a tax administrator for Wisconsin: "If a product is mailed to me here in Wisconsin, then Wisconsin would get the tax."

To deal with the issue of remote sales, it will require federal legislation, the tax negotiators agree. In the near term, they hope to make software available free to merchants so the companies can voluntarily collect taxes under the streamlining plan.

They also hope a streamlined system will encourage multi-channel merchants to run online sales through their existing operations, rather than establishing separate, Internet-only companies that can duck taxes by avoiding "nexus" in many jurisdictions.

But Congress is not expected to act until the states demonstrate they can work cooperatively to establish a system that will work.

The National Governors Association applauded the work of the volunteers and urged them to press ahead.

"Reforming the current system is critical to an effective form of governance and commerce in the New Economy," said Raymond C. Scheppach, executive director of the governors' group. "Businesses will save millions of dollars by eliminating costs and inefficiencies, retailers and e-tailers will be treated equally, and state and local governments will be able to continue counting on sales tax revenue to support schools, roads, and police officers."

Dollars to doughnuts

But the factor that may provide the greatest relief for retailers is the establishment of uniform definitions for things that are taxable and things that are exempt, and the adoption of rules about posting and changing tax rates.

Many states, for instance, provide tax exemptions to the purchase of items such as clothing and food. Warren Townsend, a Wal-Mart (WMT: Research, Estimates) executive who has represented the nation's largest retailer in the committee's talks, said it's not that simple.

"Everyone would think clothing is clothing," he said. But most states consider golf shoes to be not clothing but sporting goods, taxable where clothing would be exempt. (Under the proposed draft, golf shoes would be defined as clothing.)

Likewise, he added, the state of Texas has rules about doughnuts. If you buy six doughnuts or fewer, the purchase is taxable. If you buy more than six doughnuts, it's exempt, Townsend said, depending on "whether it's food for immediate consumption or food to take home."

Individual state legislatures will still be able to make their own decisions about whether to tax things like food and clothing, but they would be required to use the uniform definitions in applying the tax. graphic


States mull e-tax reforms - Dec. 5, 2000


Streamlined Sales Tax Project

Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney