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CONGRESS MAY CLOSE WEB SALES LOOPHOLE

INTERNET RETAILERS MAY SOON HAVE TO PLAY BY THE SAME STATE TAX RULES AS REGULAR STORES.

By Dees Stribling

The days of the Internet as the world’s largest tax-free megastore may be numbered. A long campaign spearheaded by ICSC and other groups to oblige Internet retailers to collect and remit state sales taxes — something that is already required of brick-and-mortar retailers — appears to be bearing fruit. At press time bills were being prepared in the U.S. Congress to address the matter. Legally, most sales over the Internet are currently subject to state tax. But federal law holds that retailers are not required to collect it unless they have a physical presence in a particular state. As for those without that physical presence, states require the consumer to pay the tax on goods they buy from out-of-state retailers, including over the Internet. But with the exception of certain large, durable goods that are easy to track — and are usually not sold online, such as cars or boats — states generally do not bother to enforce tax collection on items bought elsewhere. And who expects that the consumer is going to pony up voluntarily? It is unlikely that, say, a New Yorker who buys a pile of books from booksandmorebooks.com is going to calculate his sales tax on the purchase and declare it on his state income tax form, even though there is a line on the form for that purpose.

Brick-and-mortar retailers — and state departments of revenue too — have long objected to all of this. For the states, the status quo represents a considerable amount of lost revenue. In 2004 the Center for Business and Economic Research at the University of Tennessee estimated that even with the conservative growth projections for Internet commerce, the states would lose in the aggregate about $18 billion in tax revenues under the present system in 2008 alone, and over $21 billion if e-commerce growth proves more robust. For retailers that depend on sales from physical stores, mostly small chains or independents, the issue is one of fairness as they compete against nonphysical retailers. The de facto tax-free status of the Internet has essentially been in place since before the rise of online retailing. In 1992 the U.S. Supreme Court ruled on a case having a direct impact on the way sales taxes are levied on items bought over the Internet, though the case was specifically about mail-order sales. In Quill v. North Dakota, the high court ruled that mail-order retailers — in this case, office supply retailer Quill, now defunct — did not have to collect sales tax from consumers in states in which those retailers had no physical presence.

The court’s reasoning was complex, but the essential point was that requiring distant retailers to collect sales taxes for every state would be inordinately complicated, given their widely varying tax rates and structures, and would thereby impede interstate commerce. However, writing for the majority, Justice John Paul Stevens made it clear that Congress had the authority to decide differently on the matter. “Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes,” Stevens wrote.

But Congress has since taken no action to modify the system that was affirmed under Quill, despite pressure from ICSC and other organizations. Mail-order and Internet retailers have not had to collect and remit sales tax to states in which they have no physical presence, such as a headquarters, a distribution warehouse or a store.

Soon, though, the 110th Congress may act, and states might at long last be able to require distant retailers to collect and remit sales taxes. Congressional supporters of the change are on the verge of introducing measures in both houses of Congress to make it a legal reality. In particular, North Dakota Sen. Byron L. Dorgan and Massachusetts Rep. William Delahunt are likely to reintroduce legislation on the matter in their respective chambers. Similar bills in the past failed to advance, but things could be different with this Democrat Congress, observers say.

“With a Democratically controlled Congress looking to help states pay for escalating costs of providing services and more states conforming with the Streamlined Sales and Use Tax Agreement, it could be that the stars are beginning to align on this issue,” said Betsy Laird, senior vice president of global public policy for ICSC. “We may finally see a more even retail playing field putting online retailers in-line with brick-and-mortar stores.”

The Streamlined Sales and Use Tax Agreement, sometimes shortened to SSUTA, is a voluntarily pact among 21 full-member states to define taxable items and propose uniform tax rates for each item. It was formed to address objections that states’ varying tax rates and structures are a burden on commerce. In all 45 states have a sales tax, and all are free to join the pact. But SSUTA member states still cannot obligate distant retailers to remit sales taxes. The goal of the Dorgan and Delahunt bills will be to grant them that authority.

“ICSC believes tax policy should be equitable for all forms of consumer purchases, whether they take place on Main Street, at shopping centers, via mail order or over the Internet,” Laird said. “Internet retailers should not receive a tax advantage at the expense of traditional retailers and state and local governments. We are very excited at the prospect of addressing this long-standing issue in the 110th Congress.”