Tax-free Internet shopping may be at an end
Tax protester at San Francisco "tea party" gathering on April 15 holds up sign saying "IRS: We take $$$$$$ from working people to pay for big government."
(Credit: Declan McCullagh/CNET)If a little-known but influential alliance of state politicians, large retailers, and tax collectors have their way, the days of tax-free Internet shopping may be nearly over.
A bill expected to be introduced in the U.S. Congress as early as Monday would rewrite the ground rules for mail order and Internet sales by eliminating what its supporters view as a "loophole" that, in many cases, allows Americans to shop over the Internet without paying sales taxes.
Currently, Americans who shop over the Internet from out-of-state vendors aren't always required to pay sales taxes at the time of purchase. Californians buying books from Amazon.com or cameras from Manhattan's B&H Photo, for example, won't pay sales taxes at checkout time that they would if shopping at a local mall.
"We will have the bill ready for introduction by next Monday," said Neal Osten of the National Conference of State Legislatures. "We finalized the language and now we're working out the remaining issues and adding some new provisions at the request of various stakeholders."
This is hardly a new debate: pro-tax officials and state governments have been pressing Congress to enact such a law for at least seven years. They argue that reduced sales tax revenue threatens budgets for schools and police, and say that, as a matter of fairness, online retailers should be forced to collect the same taxes that brick-and-mortar retailers do.
Even though those arguments have been unsuccessful so far, the National Conference of State Legislatures and its allies believe the recession has sliced into sales tax revenue so much that Congress will have to act. A report this week from the Rockefeller Institute says that sales taxes have declined by 6.1 percent, the largest decline in half a century.
"One of the big things the states have learned in the recession is they have declining revenues," said Scott Peterson, executive director of the Streamlined Sales Tax Project, which counts state politicians and tax collectors on its governing board. "We're very optimistic about Congress this year. We think we are within a day or two of finalizing the legislation."
The final legislation is expected to be introduced by Sen. Mike Enzi, a Wyoming Republican, and Rep. Bill Delahunt, a Massachusetts Democrat, who have championed similar proposals in the past. Delahunt's office on Wednesday confirmed he was interested; Enzi's did not respond.
On the other side are the Direct Marketing Association, the Electronic Retailing Association, and companies including eBay, L.L. Bean, and Overstock.com. One of their biggest objections to the idea of collecting sales taxes on out-of-state shipments is the dizzying complexity of state laws.
Take candy, which would seem to be a straightforward item to tax. It isn't. During a 2003 discussion of tax policy, a representative of Indiana, James Turner, noted that a proposed definition of candy would have taxed the Milky Way Midnight candy bar but not the original Milky Way bar.
But further investigation showed that Turner's counter-proposal would have treated "certain flavors of Pop Tarts" and Cookies and Twix Crunchy Cookie Bars as candy--but not Cookies and Snickers Crunchy Cookie Bars. Peanut butter Girl Scout cookies would be candy, but Thin Mints or Caramel deLites would be classified as food.
Bizarre distinctions like this, coupled with the existence of more than 7,000 different tax agencies, are why the U.S. Supreme Court ruled that out-of-state retailers generally couldn't be obligated to collect sales taxes unless Congress changes the law. The justices noted in a 1992 case called Quill v. North Dakota: "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes."
One exception to that rule is a legal concept called "nexus," which means a company can be forced to collect sales taxes if it has a sufficient business presence. If Amazon had an office in California, it already would be collecting sales tax for Golden State residents. (Another exception is the sale of cigarettes, which is covered by the Jenkins Act.)
In response to complexity concerns, the pro-tax forces have offered a proposal that they hope Congress can be persuaded to adopt. The concept is called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of sales tax laws' most notorious convolutions.
Since 2003, more than 20 states have signed on, either wholly or partially, to the agreement, meaning they agree to simplify their tax codes and make them uniform. If enough states participate, proponents believe it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers.
"You'll see governors from states who are active participants pushing the Hill to move the issue forward--Kansas has been a long-standing leader. North Dakota, Iowa, Oklahoma, those are some with members on the governing board," said David Quam, director of the office of federal regulations at the National Governors Association. "The states have done the heavy lifting of coming up with a voluntary system that makes sense. Now it's Congress' turn to grant states the authority to collect this."
Representatives of the Streamlined Sales Tax Project are gathering in Washington, D.C. next month for a three-day governing board meeting, including a "lobbying day" that's scheduled for May 13.
Under existing law, the caveat is that online purchases from sites like Amazon and eBay only seem to arrive tax-free. Legally, however, purchasers are required to pay their own state's sales tax rate--the concept is called a "use tax"--and then voluntarily report the amount owed at tax time.
California residents, for instance, are now burdened with a sales and use tax of at least 8.25 percent. State law is strict: if Californians travel to a state with a 5 percent tax and shop there, the law requires them to cough up the 3.25 percent difference when they return. Online purchases are taxed as well.
But compliance is spotty at best. California's Board of Equalization estimates the state lost $1.34 billion in 2003 because residents aren't paying use taxes--and attributes $208 million of that to online purchases.
"There's no member of NRF that does not support" the forthcoming legislation, said Maureen Riehl, vice president of government relations at the National Retail Federation. "The sooner we can get it done the better, as far as retailers are concerned."
Online retailers tend to disagree. If the Streamlined Sales Tax Project (SSTP) were actually simple and easy for a shipper to work with, they might be more willing to compromise, but that may not be the case.
"The states are desperate for new revenue and I think they realize they're straying far from the simplification they originally promised," said Steve DelBianco, executive director of NetChoice, which counts as members AOL, eBay, NewsCorp, Oracle, Verisign, and Yahoo. "That creates an urgency on their part--to get the federal mandate before it becomes clear they have no intention to simplify."
"They have no real intention of simplifying or compensating sellers for the burdens of collecting," DelBianco said. "It's a shell game."
Among his complaints: That states are unwilling to compensate sellers for the burden of sales tax collection; that small businesses with minimal sales should be exempt; that only one state (as opposed to all states) should be able to audit a business; that participating states are not paying attention to the idea of simplification and are actually making definitions more complex.
"There has to be some oversight," DelBianco said. "These guys have demonstrated--the streamlined states have demonstrated -- an inability to stick to the streamlined promise. Only the U.S. Congress is going to be able to protect sellers from unreasonable burdens."
CNET's Stephanie Condon contributed to this report.
Declan McCullagh, CNET News' chief political correspondent, chronicles the intersection of politics and technology. He has covered politics, technology, and Washington, D.C., for more than a decade, which has turned him into an iconoclast and a skeptic of anyone who says, "We oughta have a new federal law against this." E-mail Declan. 
By the way, get off our streets and sidewalks freeloader.
Consider the following:
Consumer (A) while on vacation in New York purchases a stereo-system from Vender (A) in New York, paying the proper sales tax upon receiving the goods from Vender (A).
This Constitutes a Moral and Legal tax upon receipt of goods purchased in the State of New York.
Consumer (B) who lives in Ohio, while online surfing the net, comes across a website from Vender (B) who lives in New York. Upon considering the shipping cost Consumer (B) decides to purchase a stereo from Vender (B) website. Vender (B) charges the price of the goods and shipping and Consumer (B) receives an online conformation of goods purchased and an approximate delivery date of goods.
This Constitutes a Moral and Legal tax free transaction conducted in the non-state of cyberspace, because a promise of delivery of goods from Vender (B), by a third party, the shipping entity, to Consumer (B) is the only thing that has transpired in the State of New York. Therefore the State of New York cannot, Morally or Legally charge Consumer (B) a New York sales tax because the Consumer has not received any goods in the State of New York. New York could charge the New York shipping company being used by Vender (B) some form of transport of goods tax.
But New York cannot ever morally and legally be given the right to tax Consumer (B) in Ohio. Because if they can so can the state of Florida.
Let me get this straight.
We would get taxed the following under this new legislation:
Tax #1: We would purchase the product (thus local state/sales tax) which is common.
Tax #2: We would sell the product online (and get taxed from the income/profit of the sale).
Tax #3: The purchaser of our product would get taxed from their local state government wherever they reside.
Am I reading this correctly? So are we now talking about 3 different sets of taxes in addition to our standard state and federal income tax? In california it is currently 9.25% and climing for just the sales tax.
God help us all, we have politicians living on a different planet.
This is not a partisan, liberal, republican, etc.. issue. This is an issue about common sense on a level as broad as humanity. Revenues are down because people do not have the money they used to. They have lost their jobs. You don't keep jacking the $hit out of people when they don't have jobs and don't have the money they used to.
Taxing online sales is the straw that broke the camels back.
I am offended, ashamed, and not proud to be american any longer.
If you go to your local Sears you pay local and state tax
Under the proposal:
If you go to Sears.com you would pay local and state tax
As it is now Sears does not charge you any tax and leaves it up to you to make that declaration on your income tax return. Which of course nobody does.
The loop poll is an interesting one. If I go to Target and buy a shirt I pay sales tax. If I go to Target.com and buy that same shirt I pay sales tax because Target has a brick and mortar presence in my state. However, if I go to Amazon.com and buy that same shirt through Targets Amazon partnership I do not pay sales tax.
Your conclusion that this will double or triple tax people is incorrect. It is trying to close (rightly or wrongly) the loop poll that give Amazon sales tax free business.
Since Sears, Target, Best Buy, Wal Mart etc operate in nearly ever state, it would make sense that you would be charged tax, but for a business with no in state operations where you are located... it seems wrong to be charged state tax.
It does seem like the same item will end up being taxed multiple times by the government and I just can't find it in me to agree to that. I can understand the need for taxes, but not taxing and taxing it again.
Of course the other side of it is all the government paid parties, hooker excursions, pork belly spending and so on.
Now the same political hacks will direct their incompetence on the one element of the economy that has eluded them-the internet. I'm sure they'll do everything they can to turn the internet into the same bleak wasteland they've created in so many of the Main Streets of their own states.
As for the "brick and mortar" retailers, they should be doing everything they can to lower sales taxes in their home states, not rob the consumer of their ability to shop either the internet or their local store.
My, doesn't that arrangement sound beneficial to the public.
I say make the people that voted for "change" pay the taxes.
Why are people so STUPID!
Sure, maybe there's going to be meager income tax cuts for middle america, and then we're going to get taxed to death on everything else.
That's a common argument to throw blame to others and try to make one party seem innocent- well, in this case, the Democrats had the ability to stop this but did not take those actions. By their inaction, they are guilty of this result as well.
Both parties are very much interested in seeing taxes raised wherever and however possible. Blaming one or the other won't change that.
15%? You wish. Even when Regan floated the idea of a flat tax he was talking somewhere between 12 and 15% and that was 25 years ago when the coast of government was cheaper. Most Flat Taxer's today are talking in the 20% figure.
Which would be a significant increase for about 60% of Americans. The majority do not pay the 30% you claim. That is very much a minority tax bracket; unless you believe the average yearly income is six figures.
Problem Solved
Customs already can't track the millions (billions?) of individual small purchases that are already coming from China, Korea, Thailand, Mexico, etc.
Why pay some rich American to import, ship, and tax an item?
A whole new economy for those poor caribbean islands . . .
All you have to do is sell on ebay you will need a tax id # .
Now you can buy things online tax free with your tax id # for resale.
They will never win this one.
Why does the US do this - I can see it only making sense when the bricks'n'mortar store only sells to businesses (e.g. warehouse stores like Costco) that can claim back the sales tax, but open-to-the-general-public US stores do it too and it's maddening!
Alaska
Oregon
Montana
Delaware
New Hampshire
Oh, and some states that have no STATE sales tax, there exists some local governments do have a sales tax on goods.
The only way a universal sticker price in USA would work is if the Federal government abolished the ability of any other government entity from imposing sales tax and make a universal sales tax law stating the amount of sales tax that can be levied anywhere at the same time. And due to the size, and that darn Constituion of the USA (lucikly for us), they can't. Course the people who has authortiy to tax usually ignore the Constitition when they can get more money (power) and there is no appeal from the tax man. You appeal to the same people who make the rules and thus always lose.
I have a small online business. If the Internet tax passes, I'll simply have to close my business because I do not have the time to change all my sales pages, and keep records for 50 states.
The worst thing any government can do is raise taxes during a recession. My state increased what was taxable by sales taxes during the last recession and put my brick and mortar store out of businesss because it had the effect of raising prices when my customers' incomes were down or disappearing.
Thanks.
I stand corrected. I don't live in his state, nor do I know much about his policies. He ran and was elected as a Republican however. But I'm not trying to argue semantics -- you can call him a pink bunny rabbit if it makes you happy.
My original point is that this is a bipartisan issue -- meaning that both major parties want a piece of the Internet Tax action. This bill has come up before Congress before -- and if this measure is defeated, it will come up again. There are 20 states that are part of the streamlined tax coalition -- not all Democrat states. Kansas, North Dakota, Iowa and Oklahoma are not exactly Democrat strongholds. Simple point being, don't try to oversimplify this as a typical Democrats vs. Republicans issue, because it's not.
- by mmormando April 16, 2009 6:29 AM PDT
- It all very well to pass this law...then its up to the merchants to implement the friggin thing! How 'bout this can only go into effect after all the states have some sort of web service put up that would take something like zip code, item ID number, and sale price, then return the tax owed and to what tax authority.
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- by desertd April 16, 2009 12:48 PM PDT
- It's not even that easy. I worked for a company that did business online. When we sold soda pop to a specific county in Texas, it was treated as food, and not taxed, but a neighbor down the street (same zip code) lived in a different county. There, the soda was treated as a convenience item, and was taxable. In some places, if you buy a single can, that's taxable, but if you buy a six-pack, that's not taxable. Also, since a neighbor may live in a different town or county, you had to know if that town or county had it's own tax rate. There was no software for our ecommerce package that would do handle these types of situations. The tax auditor for the state of Texas had no sympathy. It didn't matter to them that doing this was nearly impossible. We were a small company, and I can't imagine how would we handle this for 50 states, let alone one state.
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- by mmormando April 18, 2009 5:01 PM PDT
- Right, that's why I said that the states would be responsible for providing a service that would allow you to tell them what was being sold and how much is was, and it would be THEIR responsibility to give you back the amount of tax. I agree its too big a burden for individual businesses to implement, if the states want items taxed, then they need to bear the responsibility of figuring out what that amount should be.
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Showing 1 of 4 pages (97 Comments)Otherwise, screw'em.