[Am-info] States were to Vote Today on Internet Sales Tax Plan(OT)

[Fred A. Miller]

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http://www.washingtonpost.com/wp-dyn/articles/A40364-2002Nov11.html =20

States to Vote Today on Internet Sales Tax Plan
Uncertain Prospects for Approval by Republican Congress=20

By Brian Krebs
washingtonpost.com Staff Writer
Tuesday, November 12, 2002; 12:00 AM=20


As the holiday shopping season shifts into high gear, revenue-hungry stat=
es
will vote today on a plan to tax all Internet sales.=20

Tax officials and legislators from 31 states -- including Maryland,
Virginia and the District -- are meeting in Chicago today to vote on a
proposal to simplify their tax laws and enter into a voluntary pact to
collect online sales taxes.=20

"This is a 21st century system that will dramatically improve the morass
that currently exists," said Utah Gov. Mike Leavitt (R), a key leader in
the states' effort. "I'm confident that this agreement will be approved b=
y
a majority of the states and will mark the beginning of a new phase of th=
is
process."=20

The plan up for consideration today is part of a bid to win approval from
Congress for a mandatory online sales tax collection regime.=20

The states participating in the tax effort -- known as the Streamlined
Sales Tax Project -- plan to ask Congress to make their proposed tax syst=
em
mandatory nationwide when at least 10 states representing 20 percent of t=
he
U.S. population have amended their laws to implement the program, said R.
Bruce Johnson, commissioner of the Utah state tax commission and co-chair
of the implementing states group.=20

"We think that once these states have simplified their systems it will be
appropriate for the federal government to reward that effort," Johnson
said. "We're doing everything we can to make it clear that the states can
work together."=20

Currently, 45 states and the District of Columbia levy sales taxes, with
rates varying from state to state -- and often from town to town.=20

Under the Streamlined Sales Tax Project proposal, states would be require=
d
to establish uniform definitions for taxable goods and services, and
maintain a single statewide tax rate for each type of product.=20

The project also seeks to simplify tax reporting requirements for online
sellers, said Jason Feuchtwanger, spokesman for the National Governors
Association.=20

"We're trying to move from a situation where a nationwide vendor is
responsible for potentially 7,500 returns to a system where they can just
submit a single return to each state and let (the state) handle the
disbursements," Feuchtwanger said.=20

Today's vote is a welcome development for the nation's largest main stree=
t
retailers, who have argued for years that the current system gives online
vendors an edge over so-called "bricks-and-mortar" stores.=20

"Our ultimate goal is that everybody will have to play by the same rules,=
"
said Maureen Riehl, state and industry relations counsel for the National
Retail Federation, a trade group that represents nearly 1.4 million store=
s.=20

And for states facing rising budget deficits, the stakes are huge. The U.=
S.
General Accounting Office has estimated states lose nearly $13 billion ea=
ch
year on untaxed Internet transactions. That figure will more than triple =
to
$45 billion by 2006, according to a 2001 University of Tennessee study
conducted for the Institute of State Studies.=20

More Paperwork for Businesses

Despite the apparent critical mass behind today's vote, several unanswere=
d
questions loom large, including how to win support for the system from
online retailers.=20

Most states have "use tax" laws that require people to file a special for=
m
for reporting the sales taxes they owe on items bought online, but such
laws are notoriously difficult to enforce, and few people actually comply
with them.=20

Rather than going after use taxes, all of the participating states plan t=
o
entice online merchants to collect sales taxes voluntarily by sharing wit=
h
them a portion of the tax revenues that they remit. Currently, one-third =
of
all states share sales tax revenues with online retailers, with
reimbursement rates ranging from a half percent to 1.75 percent of the
total taxes collected.=20

Revenue sharing aside, small and large Internet businesses that maintain =
a
physical presence in just a handful of states while selling to customers
nationwide are likely to balk at the costs of collecting sales taxes, sai=
d
Richard Prem, director of global indirect taxation for Amazon.com.=20

A unified revenue-sharing model envisioned in the states' plan fails to
"come anywhere close to scratching the surface of the cost" of complying
with the system, he said.=20

Internet vendors would likely bear substantial costs just in terms of the
tax preparation needed to file as many as 45 separate tax returns each
year, experts contacted for this story said.=20

Under the states' plan, online sellers would be required to purchase
approved software to compute the appropriate state and local taxes or to
certify with the state any in-house calculation systems already in place.
E-tailers could choose to outsource tax collection to a certified
third-party under the states' plan.=20

So far, participating states have conducted only one tax software pilot,
involving four states, three technology vendors, and one online seller.=20

Of the technology vendors participating in the pilot, just one -- Salem,
Mass.-based Taxware, working in conjunction with Hewlett-Packard -- manag=
ed
to get a system up and running.=20

The online store in that pilot was O.C. Tanner Co., the Salt Lake
City-based company that forged the medals for the 2002 Winter Olympic Gam=
es.=20

O.C. Tanner tax manager Jake Garn said Taxware's software worked well, bu=
t
wondered whether the system would function as smoothly when subjected to =
a
much larger volume of queries from all 45 participating states.=20

 "[T]his was very small transaction volume compared to the level of traff=
ic
our main business generates," Garn said.=20

Neither supporters nor opponents of the plan have a clear idea how much t=
he
whole collection and remittance package would cost the average Internet
merchant, though the participating states plan to conduct a comprehensive
study in the coming months. They also are planning to run another tax
technology pilot.=20

Aside from the cost considerations, though, opponents of the plan say it
would be tough to enforce and could infringe on consumer privacy.=20

"Whether I'm buying prescription drugs or sex toys online, someone is goi=
ng
to have to keep track of what I bought so they can figure out how to tax
it," said Grover Norquist, president of Americans for Tax Reform. "How do
you do this without massive violations of privacy?"=20

Under the states' plan, certified software vendors and service providers
would calculate and report taxes without retaining the consumer's
personally identifiable information. According to the proposal, that
information would be kept only for items that are deemed exempt from
taxation, a qualification that varies from state to state.=20

The sales tax effort may also pit small Internet sellers against larger
operations. Larger Internet retailers that maintain offices or sales forc=
es
in the majority of the states stand the most to gain from the states' pla=
n,
the NRF's Riehl conceded. Larger retailers also are more likely to alread=
y
have built in-house tax collection and remittance systems.=20

"The (sales tax) simplifications alone are going to amount to a net cost
savings for our members," she said. "We see the reimbursements as a long
overdue acknowledgement that there's a substantial cost to doing this."=20

Questionable Fate in GOP Congress

Streamlined Sales Tax Project supporters said they expect states
representing a fifth of the U.S. population to pass implementing
legislation by June 2003, the end of the fiscal year for most states.=20

"I think by the middle of next year at least 10 states will have passed t=
he
necessary legislation, particularly when they start noticing the millions
of dollars it will take to settle their deficit situations," said Neil
Osten, communications director for the National Conference of State
Legislatures, which fully supports the simplification effort.=20

It remains unclear, however, whether or when the Republican-controlled
Congress would recognize the compact.=20

The current legal block to online sales taxes dates back to 1992, when th=
e
U.S. Supreme Court ruled that merchants cannot be required to collect sal=
es
tax unless they have a physical location in the state where the customer =
is
located. The court said it would be unfair to require out-of-state seller=
s
to comply with thousands of state and local tax jurisdictions across the
nation. But the high court also ruled the Congress has the authority to
allow states to require remote sellers to collect taxes.=20

In 1998 and again last year, Congress debated tying legislation to reward
the states' efforts -- should enough of them simplify their tax systems -=
-
to a bid to extend a ban on Internet-specific taxes, such as taxes on
Internet access fees. In each case, Congress voted to extend the ban
without including the simplification incentives.=20

A least one influential opponent of the effort is already planning
legislation that would keep the Internet access tax ban from being "taken
hostage" as a vehicle for considering the states' proposal.=20

Sen. George Allen (R-Va.) said the first piece of legislation he will
introduce next year would be a standalone bill to permanently extend the
ban on new Internet-specific taxes.=20

"If the states want to come up with their own simplification schemes,
that's fine. But that still doesn't make it right to require someone who
has no representation in your state to pay taxes there," said Allen, who
heads the Senate Republican High-Tech Task Force.=20

Leavitt and other supporters of the proposal disputed arguments such as
Allen's.=20

"It ignores the fact that sales and use taxes aren't imposed on people wh=
o
collect them, they are paid by the people doing the buying," Leavitt said=
=2E=20

In the meantime, online retailers would be wise to seize the
revenue-sharing incentives included in the states' plan before it's too
late, O.C. Tanner's Garn said.=20

"If the states are right, and enough business shifts online that it creat=
es
a much larger cost disadvantage, the states may then have the political
muscle they need to get Congress to back this without any" revenue sharin=
g
for retailers, he said. "Maybe it's a good thing to try to see the future
and work for a mutual solution."=20


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