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FIGHT HEATS UP OVER E-TAIL TAX

States, industry campaign for mandatory collection

BY IAN RITTER

In February some of the industry’s largest retailers, including Target, Toys ‘R’ Us and Wal-Mart, voluntarily started collecting state sales taxes on merchandise sold over their Internet sites. But states and shopping center owners are continuing with their push to make such collections mandatory.

Retail real estate owners and cash-strapped states are pressing for federal legislation to require all retailers to collect these taxes. The Washington, D.C.Ðbased National Governors Association estimates that state governments will lose $27 billion this year and $41 billion by 2005 on uncollected online sales taxes — money they can ill afford to lose as the weakness of the U.S. economy continues to squeeze their revenues. Municipalities are similarly hurt, say advocates for the legislation.

This inability of the cities to collect Internet sales tax is “killing us,” said Doug Scott, mayor of Rockford, Ill., speaking at ICSC’s Illinois Alliance Program in February. “There are literally hundreds of millions of dollars that are lost.”

For their part, landlords say tax-free online shopping gives Internet retailers an unfair advantage, notes Elizabeth Holland, chairwoman of ICSC’s economic subcommittee, which deals with government-related issues, and also CEO of Chicago-based Abbell Credit Corp. “It’s created an unlevel playing field,” she said.

In many states, consumers are expected to voluntarily pay sales or use taxes on remote purchases, but few ever do.

Although it is unclear exactly how much landlords are losing as a result, but Internet sales now account for 3 percent of all retail sales, and that will increase to 8 percent by 2007, according to Cambridge, Mass.-based Forrester Research.

ICSC members were to discuss the issue with legislators at last month’s Congressional Contacts Meeting, which was scheduled to take place after SCT’s press deadline. Though there is currently no proposed bill in Congress, Wayne Mehlman, ICSC’s director of economic issues, said he expects a hearing on the matter this year.

The advocates of change want Congress to readdress the Supreme Court’s 1992 Quill v. North Dakota decision that says retailers are not obliged to pay sales taxes to states and local jurisdictions unless they have a physical presence in those areas. Seattle-based Amazon.com, for example, is only required to collect sales taxes on purchases in North Dakota and Washington state, where it has a physical presence. But even if a retailer has stores in all 50 states, it can avoid collecting Internet sales taxes in those states where its dot-com subsidiary has no physical presence, such as offices or warehouses. There is a bill now before the California legislature that will try to change that. Its backers want online sales tax collected by a company’s dot-com subsidiary if it has stores in the state.

Target, Toys ‘R’ Us, Wal-Mart and seven other large retailers broke with other online merchants in February, forging a voluntary agreement with 37 states and the District of Columbia to begin collecting sales tax under a program called the Streamlined Sales Tax Project, regardless of whether the retailers’ dot-com arms have a physical presence in those states.

Some note that this initiative wasn’t entirely altruistic: The deal was made in return for an agreement that the states wouldn’t go after them to recover taxes they haven’t collected in the past. Nevertheless, it is a step in the right direction, said Frank Shafroth, director of state and federal relations for the National Governors Association.

For these states to actually collect, though, they have agreed that 10 individual state legislatures whose state populations represent 20 percent of the U.S. population must first approve the measure, said Shafroth, whose association is heading the program. That isn’t the case yet, though six more states — Minnesota, North Carolina, North Dakota, South Dakota, Utah and Wyoming — are close to passing such legislation, he said. Even then, they would only be collecting from retailers who volunteered to participate. Under the Streamlined Sales Tax Project, states would provide tax-collecting software to these retailers.

The project is important, because federal government action will be a long time coming, Shafroth said. State taxation issues are usually a low priority on Washington’s agenda. “I don’t think it’s something they’ve ever wanted to deal with,” he said.

Ivan J. Novick, the vice chairman of ICSC’s economic subcommittee and chairman of Pittsburgh-based Oakmont Realty Partners, shares those fears.

“It might take longer than people think,” Novick said. “I’m just not sure what the GOP’s priorities in this are.”

But Novick said he remains hopeful that pressure applied by state governments and groups like ICSC will make an impression on federal lawmakers.

Pure-play Internet retailers such as Amazon remain adamantly opposed to taxing online sales. (Ironically, Amazon is host to some of these same retailers, including Toys ‘R’ Us and Target, and will now be collecting taxes on their behalf.) Also opposed is the New York City-based Direct Marketing Association, which has 4,000 members. “What you’re talking about is a broad change in the way interstate business is done in the United States,” said Louis Mastria, a spokesman for the association. A lot of catalog and Internet retailers are small businesses that would have trouble implementing the proposal because of their small staffs, he said. “With some of my members, the CFO is the janitor. He cannot be doing this.”

But a tax on Internet sales will have little impact on online retailers, according to New York City-based Jupiter Research, in a report titled “Avoidance Is Imperative to Few Online Retailers and Ultimately Futile for All.” The report says that online sales tax collection will be mandatory in three to five years, but that this will not deter shoppers. Eighty-two percent of consumers who shop online are either unaware that they can avoid paying sales tax on the Internet or don’t care, the report says.

Congress will pass legislation in response to pressure from the Streamlined Sales Tax Project, a “more rigid interpretation” of retailers’ physical locations and tight local government budgets, the report predicts.

Action couldn’t come too soon, said Scott, the mayor of Rockford, Ill. He says he is not sure exactly how much money his city of about 150,000, 90 miles northwest of Chicago, is losing. But any additional sales tax revenue would help, he said. Rockford had to cut $6 million out of last year’s budget, and the city hasn’t bought police cars or fire trucks for the past two years. Collecting online sales taxes could help make some of those ends meet, he said.

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