Tax-Free Online Shopping May End

WASHINGTON -- When state legislatures reconvene in January, imposing an Internet sales tax could be high on their agendas. That's because delegates from 31 states have approved a program to streamline the now fragmented sales tax programs.

"This [program] is a 21st century system that will dramatically improve the morass that currently exists," says Utah Governor Michael Leavitt.

The plan calls for uniform definitions for taxable goods and one statewide sales tax rate by 2006. Known as the Streamlined Sales Tax Project, it received the nod Tuesday.

States' Choice

To start collecting, states must now enact tax laws that correspond to the proposal. According to the National Conference of State Legislatures, lawmakers from Minnesota, North Carolina, Wyoming, and Wisconsin have already done so.

States with large cities, such as New York and Illinois, may be the last to change their systems because the local governments have their own sales tax laws to raise money, says Neal Osten, senior committee director for the state legislators' conference.

Once ten states representing 20 percent of the population change their systems, companies could voluntarily impose an Internet sales tax. At that point, Congress could also approve a mandatory online sales tax, but only for states that successfully simplify their tax laws, says Osten.

Disjointed Laws

The District of Columbia and 45 states now collect sales tax, but at widely varying rates. More than 7000 state and local tax jurisdictions have different laws and definitions of what they can tax.

"Simplification is the first step toward a level playing field," says Maureen Riehl, vice president of the National Retail Federation, a trade group that represents nearly 1.4 million stores. "Once the system is simplified, we can convince Congress to apply the same rules to everyone, whether they sell their merchandise from a storefront, over the phone, through a catalog or on the Internet."

If the states act, this would be the first revamping of the nation's sales tax system in 40 years.

Ten years ago, the Supreme Court ruled that states cannot force retailers to collect (and hand over) sales taxes unless they have a physical presence in the customer's state. For example, Seattle-based Amazon cannot collect sales tax in California. However, the Supreme Court ruling does allow Congress to impose an Internet sales tax once states simplify their programs.

In November 2001, Congress approved a two-year extension on the Internet sales tax moratorium. This banned Internet access taxes on Internet service providers, but does not apply to states that collect taxes on Internet purchases.

Online Incentive

Online shoppers are supposed to pay sales tax, but many states don't have an effective way to collect them, Osten says.

"This is not a new tax because consumers already owe it, but states can't collect it," Osten says. "Whether you buy [a product] in the store or on the Internet, it should be treated in the same way."

For states with budget problems, this seems like an attractive solution. The U.S. General Accounting Office estimates that states lose $13 billion each year on untaxed Internet transactions. A 2001 University of Tennessee study suggests this number could more than triple to $45 billion by 2006.

"When states realize how important this money could be to their budget deficit ... it makes it more likely we are going to succeed next year," says Osten, who will now focus on educating the more than 2000 newly elected state legislators.