States trying online tax pilot

To ease the confusion and controversy about collecting sales tax on Internet purchases, four states will pilot a program starting Oct. 1 in which participating retailers will test software specially designed to calculate collect, and remit taxes.

If the efforts of Kansas, Michigan, North Carolina and Wisconsin are successful, the pilot could lead to model legislation that could modify the sales tax collection system.

For now, people who buy from Internet retailers aren't charged sales tax. Online 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.

States and municipalities argue that this exemption is causing them to lose millions in tax revenues. 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 what's called a complementary use tax, which are levies on out-of-state purchases. Currently, 45 states levy a sales tax and a use tax.

So for the past seven months, a coalition of 27 states, participating in the Streamlined Sales Tax Project, has tried to simplify and modernize procedures for all retailers in an effort "to level the playing field," said Christine LaPaille, spokeswoman for the National Governors' Association, one of four organizations sponsoring the effort. To that end, coalition members have been holding public hearings once a month regarding the effort.

According to the NGA, the new system would:

* Make definitions of goods uniform so that retailers can easily tell whether what they're selling is taxable or exempt in different jurisdictions. For example, a marshmallow may be considered a food in one jurisdiction and a candy in another. That proposal would standardize the definition of marshmallow.

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

* Make sourcing rules uniform , which means linking tax jurisdictions to postal ZIP codes so it's easier for businesses to determine what the tax rate is in a particular jurisdiction.

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

However, LaPaille said, state legislatures would have to pass legislation and that might prove difficult.

Jim Whitney, spokesman for Dulles, Va.-based America Online Inc., said his company supports the simplification of the sales tax as well as tax procedures that are fair for all retailers.

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