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States lobby Congress again on Internet sales taxes

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Lamenting lost tax revenues from online sales, state governments have been lobbying Congress for years to pass Internet sales tax legislation.

At the heart of the debate is the lack of consistency in how taxes on Internet sales are handled. Currently, state sales taxes are collected by some e-commerce sites but not by others. State taxes are collected by companies who have a "nexus"—a physical presence—in a state, and some e-commerce sites unilaterally add state taxes to simplify their own accounting records.

The taxation issue is rising to the surface again because the federal Internet Tax Moratorium, which applies strictly to access taxes that could be charged by Internet service providers to their subscribers, is set to expire on Nov. 1. Observers believe the end of that moratorium will give states an opening to call for Internet sales taxes.

"Every time this moratorium comes up for re-authorization, the [National] Governors Association has tried to stick a rider on the back of this popular legislation, saying: ‘Since we’re dealing with taxes, we want the authority to force them to collect taxes on our behalf,’ " said Louis Mastria, director-public and international affairs for the Direct Marketing Association.

Uncollected amount debated

Much of the argument in favor of collecting state sales taxes rests on data derived from a University of Tennessee study conducted two years ago. The study, based on Forrester Research Inc. data, estimated that uncollected state sales tax from e-commerce amounted to $13 billion in 2001 and this total would increase to $45 billion in 2006.

However, that study has been accused by some of overestimating its projections.

Last month, the DMA did a state-by-state study based on U.S. Department of Commerce data that showed significant disparities with the University of Tennessee results. For example, the DMA analysis predicted that by 2011, California would receive $592.8 million in online taxes, while the university study’s projection for California was $7.2 billion.

Like other opponents, the DMA has argued that requiring sellers to collect sales taxes would impose undue burdens, especially on small businesses. Sellers would have to collect and remit taxes based on more than 7,500 individual tax rules that vary by county and state.

For this reason, Internet sales tax opponents have long suggested a first step should be a simplification and standardization of state tax rules.

In fact, headway is being made in this area. Currently, 32 states support the Governors Association’s Streamlined Sales Tax Project, a proposal for a simplified sales tax system.

Streamlined taxes

Several b-to-b marketers endorse the SSTP. "We very strongly support the streamlining of Internet sales tax collections," said Thomas Stemberg, chairman and founder of Staples Inc., Framingham, Mass.

Others echo Stemberg. "HP feels that rather than just saying, ‘no, you can’t tax commercial transactions on the Internet,’ instead let’s figure out a system to treat the online and offline commercial marketplace the same," said John Hassell, director-federal and state government affairs at Hewlett-Packard Co., Palo Alto, Calif.

But there remains significant opposition. EBay Inc., which handled about $1 billion in b-to-b transactions in 2002, is one opponent. "We’re much closer to a Nasdaq than a Border’s bookstore," said Tod Cohen, associate general counsel-global policy at San Jose, Calif.-based eBay. "We’re just an intermediary. We don’t ever sell anything."

Forrester Research analyst Kate Delhagen said groups resistant to the tax fall into three camps: the "pure-play" Internet companies, which have no incentive to collect taxes because they have no brick-and-mortar retail presence; catalogers that do not have much of a "nexus" issue; and very small sellers for whom "charging tax and remitting to a number of jurisdictions would be quite complicated."

Delhagen expects a move by states toward collecting sales tax on Internet commerce within two years, as the Streamlined Sales Tax Project gains momentum.

Meanwhile, many marketers have adopted a wait-and-see stance.

"It’d be nice to have some clarification," said Robert Warren, senior VP-president of direct marketing at Groton, Mass.-based New England Business Service Inc., a company that sells business forms through several direct marketing channels.

"We don’t have plans to collect taxes unilaterally until we know which way the states are going to go," Groton said. "My guess is that this is inevitable. This is going to happen."

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