Sales Taxes Hit the Web

Hope you enjoyed last year's online holiday shopping deals, because the bottom line may well be higher at your favorite Net retailer next time around. No, it's not a bout of Internet inflation. It's state sales taxes, coming soon to a Web store near you.

States have complained for years that they've been missing out on tax dollars generated through Internet sales. Online retailers avoided collecting sales taxes due in part to a Supreme Court ruling that cited the complexity of such a task.

But that's about to change. Under the Streamlined Sales Tax Project, a states-led initiative to simplify sales taxes, roughly 40 states have been working to clarify their tax codes to make collection easier. (Currently, a seller that's online--just like any mail-order retailer--has to collect sales tax on a transaction only if it has a physical presence where the buyer resides.)

In November 2002, SSTP participants approved a new set of guidelines, the first step toward agreeing on definitions of items to be taxed. This is key, as the more than 7000 local and state jurisdictions involved often have different definitions for the same item (for example: Are marshmallows food or candy?). More than 27 states plan to introduce legislation to adopt the new rules as law, according to SSTP steering committee member Bruce Johnson.

Utah Governor Michael Leavitt calls the new rules "a 21st-century system that will dramatically improve the morass that currently exists." States and cities would still set their own tax rates.

Big Money at Stake

Potentially at stake are billions of tax dollars, though specific numbers vary depending on the source. Wisconsin alone claims it lost about $250 million in sales tax revenue last year--a sizable amount that's hard to forgo in a tough economy.

Even if every state passes SSTP legislation, not every online seller will collect sales taxes. The system remains voluntary because states can't change interstate commerce laws. That's up to the federal government, which is the SSTP's next target.

Once ten states representing 20 percent of the U.S. population pass the tax rules, the governors and state legislatures of all the states participating in the SSTP will ask Capitol Hill for laws to make seller compliance mandatory, says Diane Hardt, cochair of the SSTP. In the states' most optimistic scenario, federal laws enforcing collection could appear as soon as 2004.

Some buyers may be seeing higher costs already. As of this writing, a group of at least five national retailers has approached state offices about voluntarily collecting sales taxes by February 1, independent of the SSTP. These vendors have negotiated with the various states amnesty deals that grant them immunity from liability for missed or improperly collected taxes on previous sales. The SSTP proposes a similar deal for vendors that voluntarily comply within a year of SSTP law enactment in their state.

Will the addition of taxes cause fewer people to shop on the Net? That's unlikely, says David Schehr, research director at GartnerG2. Most online shopping is already discretionary--shoppers buy what they want, not what they need. Moreover, most people buy online for the convenience and time savings, and paying a few dollars more will not change that pattern, he says.

Besides, if you opt to go offline to make your purchases, you'll find sales taxes ready and waiting for you there.