Take two on taxing

To ease the confusion and controversy about collecting sales tax on Internet and mail- order purchases, four states are piloting a program in which participating retailers will test software specially designed to calculate, collect and pass on tax money.

If the efforts of Kansas, Michigan, North Carolina and Wisconsin are successful, the pilot could lead to model legislation that could modify and simplify the sales tax collection system for all types of commerce. The pilot was to begin Nov. 1.

For now, people and companies that buy from Internet and mail- order retailers aren't charged sales tax. Such retailers — as long as they don't operate a bricks-and-mortar store in the buyer's state — aren't required to determine, collect and pay that sales tax, also called a complementary use tax.

Currently, 45 states levy a sales tax and a use tax, but responsibility for determining and paying a use tax legally falls on the buyer.

Kent Johnson, a partner with KPMG LLC's e-tax solutions for state and local taxes, said most companies and business entities pay a use tax because they are audited regularly, but most individuals do not.

Traditional retailers say it's not fair that they're required to determine, collect and pay sales taxes while online and mail-order retailers are exempted from the use tax. States and municipalities argue that the exemption is causing them to lose millions in tax revenues.

So for the past seven months, a coalition of 27 states has participated in the Streamlined Sales Tax Project, (www.geocities.com/streamlined2000), which is trying to simplify and modernize procedures for retailers in an effort "to level the playing field," said Christine LaPaille, a spokeswoman for the National Governors' Association, one of four organizations sponsoring the effort.

The coalition's efforts focus on several goals:

* Make definitions of goods uniform. This way retailers can easily tell whether what they're selling is taxable or exempt in different jurisdictions. "Once a state calls a chair a chair and another state calls a chair a chair, then they have the same definition," Johnson said. But states still have the option of determining whether the chair is exempt from tax or not, he said.

* Limit the number of tax rate changes states and local governments can impose. Governments can still impose their own taxes, but the coalition would limit the frequency of changes.

* Make sourcing rules uniform. That could mean tagging a product with something akin to a bar code, said project co-chairwoman Diane Hardt, a tax administrator with the Wisconsin Department of Revenue. Scanning a product would instantly tell a retailer whether that product is taxed in that jurisdiction or not.

* Have states partially pay to implement the proposed tax collection system.

The cost of such a system is a "big factor," Johnson said. He said he hasn't even heard projections on what the overall cost could be.

Hardt said the price-tag question is difficult to address, but she said she envisioned some type of compensation, such as a retailer's discount on the sales tax, as an incentive to help pay for the software.

A simplified sales tax system could benefit traditional retailers by improving the efficiency of the tax process and lowering their audit risks, Johnson said. Also, companies that are unclear whether they have to pay a use tax because laws vary from state to state and may be vaguely worded may also want to support the project, he said.

But Johnson wasn't so sure about remote retailers' support.

"If you're a mail-order seller for 30 years and do not have a physical presence outside your state, are you very likely to volunteer for this project? Why would you volunteer?" he asked.

So far, only one retailer has volunteered for the pilot project, but Hardt declined to identify the company. She said the coalition expected to present model legislation to state legislatures by Dec. 1, but cautioned that the process is a long-term effort.

She said she anticipated support from business, and she would be happy if five to 10 legislatures approve the coalition's proposal.

"I think the retailers will go to the legislatures and carry the water on this," Hardt said.

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