Small Business
States mull e-tax reforms
December 5, 2000: 8:14 a.m. ET

Streamlined system begins a trial; model laws could standardize collection rules
By Staff Writer Steve Bills
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NEW YORK (CNNfn) - State and local officials grind their teeth as they watch the numbers climb on Internet holiday sales.

Sales are expected to climb sharply this year, as a growing number of consumers avoid the malls to take advantage of the speed and convenience of online shopping.

By this time next year, some states may have laws in place to levy taxes on e-commerce. And in five years, one market researcher predicts, a nationwide system may be in place to capture sales taxes on most Net transactions.

Until now, the volume of online sales has been too small, and the tax collection issues too knotty, to make it worthwhile for elected officials to tackle the issue.

Overall in 2000, consumer spending online is expected to grow 85 percent to $61 billion, according to, a trade group representing online merchants.

Laws from the catalog era

For the most part, governments aren't getting anything out of it. Under existing law, which grew up around the catalog-sales industry, a retailer cannot be required to charge sales tax to a customer unless the merchant has a physical presence, a "nexus," in the state where the customer is.

Courts generally have held that it is unreasonable to expect stores to keep track of the tax rates in the 7,500 tax jurisdictions throughout the United States.

And while politicians in Washington, D.C., have called for keeping cyberspace a tax-free zone, to encourage the development of e-commerce, states generally have taken the stance that a sale is a sale regardless of the medium it occurs in, and they intend to capture the taxes that their laws call for.

  What we're fighting for is a level playing field for all vendors.  
  Maureen Riehl
National Retail Federation
Until now, enforcement has focused primarily on so-called "use taxes," paid by companies on equipment used in the business. Such transactions tend to be far larger than consumer purchases, and state revenue agencies already have operations in place to audit business-to-business sales.

But that is beginning to change.

The National Governors Association quietly kicked off its "streamlined state sales tax project" at the start of October, with four states -- Kansas, Michigan, North Carolina and Wisconsin -- beginning to map tax rates and jurisdictions into complex software that online merchants would use to charge taxes to customers.

No taxes have been levied through the system yet, and at least in the early stages, the only merchants who participate will be volunteers, said Frank Shafroth, director of state and federal relations at the National Governors Association.

Model legislation for states to employ

In the meantime, a task force of 29 states has been negotiating with a group of 60 leading national merchants to develop model legislation that could standardize sales-tax rules throughout the nation.

Shafroth said the group plans to have final language ready by Dec. 19, and he predicted the first six or eight state legislatures would begin considering reform in 2001 -- though he could not say which states might take the lead.

It is likely to take five years or more to develop a "critical mass" of states to make online tax collection practical, according to a recent report by market analysts at Forrester Research. Otherwise, Internet retailers will simply choose to relocate to other jurisdictions.

Merchants in the main are willing to comply, said Maureen Riehl of the National Retail Federation. "What we're fighting for is a level playing field for all vendors," she said, pointing out that Main Street stores can be at a disadvantage if online competitors offer lower prices by dodging taxes. graphic


Online merchants cut marketing costs - Nov. 28, 2000

Setback for e-tax backers - Sept. 26, 2000

States fight back on e-taxes - April 21, 2000


National Governors Association

Forrester Research

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