State taxes gain steam online

Streamlined Sales Tax Project

State governments this year are coming closer to ending the tax-free ways of online and catalog retailers.

After a three-year effort, 20 states passed laws to simplify and modernize the way they administer various sales taxes, paving the way for the creation of tax-collection software that can be distributed to Internet retailers and mail-order companies, according to the National Conference of State Legislatures.

The Streamlined Sales Tax Project — launched March 2000 by the conference, the National Governors Association, the Federation of Tax Administrators, and the Multistate Tax Commission — included representatives from 36 states who developed the model agreement. Last November, 31 states and the District of Columbia ratified the final proposal. State officials say it harmonizes the mishmash of sales and use tax codes while letting states set their own rates.

The agreement may be a basis for Congress to give states authority to require all sellers to collect sales and use taxes, because the tax application software will make it simple to determine, collect and remit such taxes, said Illinois state Sen. Steven Rauschenberger, who's chaired the legislature conference's taxation of e-commerce task force.

As long as they don't operate a bricks-and-mortar store in the buyer's states, retailers currently aren't required to collect sales tax or complementary use taxes, which are levied on out-of-state goods. As a result, the legal responsibility for paying use taxes falls on buyers. Although most companies and business entities pay a use tax because they are audited regularly, most individuals do not.

Forty-five states and the District of Columbia levy a sales tax and a use tax. However, two U.S. Supreme Court decisions established that states can't require out-of-state retailers to collect sales taxes on items sold to their residents because keeping track of rules in 7,500 taxing jurisdictions is an undue burden to interstate commerce, Rauschenberger said.

State agencies for years have complained of tax revenue losses because online stores and their mail-order brethren don't collect sales tax. And traditional retailers have long argued that online and catalog retailers have an unfair advantage as a result.

According to the state legislatures group, recent research indicates state and local governments collectively may have lost out $13 billion in uncollected sales tax revenue. The report predicts that figure may increase to $45 billion in 2006 and almost $55 billion in 2011.

Conversely, online retailers argued that electronic commerce cannot grow unless it is free of sales tax. But as a result of the states' sales tax project earlier this year, several prominent retailers started collecting sales tax online, including Inc., Wal-Mart Stores Inc., Target Corp. and Toys 'R Us.

Rauschenberger said he was "stunned" that 20 state governments, representing 30 percent of the U.S. population, enacted legislation complying with the model agreement so quickly, double the 10 needed for the agreement to take effect. Participation from states and retailers is completely voluntary.

States will give retailers software to calculate and remit taxes. The states will more than make up for the deployment costs through increased tax revenues, said Charles D. Collins Jr., former director of North Carolina's revenue department and currently government affairs director of Taxware, which has developed one such tax software program. Merchants will not be held liable for calculation errors, Collins said.

Participating states have to meet at least 30 standards. They had agreed on uniform definitions of products, such as when a candy bar is considered food.

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