Efforts to apply sales taxes equally to both bricks-and-mortar and online retailers have made substantial progress since our last update (see January 2002 issue), yet it is likely to be several more years before a level playing field becomes a reality.
The Supreme Court has ruled that states cannot compel out-of-state companies, including internet and catalogue retailers, to collect state and local sales taxes. Requiring companies to comply with the varying rules and rates governing the nation’s 7600 local and state tax jurisdictions, the Court concluded, would unduly burden interstate commerce.
The policy effectively gives distant companies, which contribute little to the communities where they do business, a five to eight percent price advantage over local stores. The issue is also of mounting concern to the states, which depend on sales tax for about one-third of their revenue. Growth in online shopping is expected to cost states an estimated $20 billion annually by 2003.
Efforts to address the problem are proceeding on two fronts. At the state level, 35 states have joined the Streamlined Sales Tax Project, an initiative organized by the National Governors Association (NGA). The Project seeks to eliminate the difficulties of complying with multiple taxing jurisdictions. Participating states agree to simplify their sales tax systems and to adopt uniform administrative rules and procedures. (Simplification involves such things as agreeing on whether orange juice is a beverage or a fruit for taxing purposes.)
Nineteen states have enacted the Project’s model legislation on sales tax simplification. Meanwhile, four states—Kansas, Michigan, North Carolina, and Wisconsin—are developing and testing software that will enable online retailers to easily collect and remit taxes for multiple jurisdictions. (To find out where your state stands, see the NGA’s map at http://www.nga.org/nga/salestax.)
Although the states are solving the logistical difficulties that online and catalogue retailers would face in collecting sales taxes—largely removing the burden identified by the Supreme Court—they still cannot compel out-of-state companies to do so. That power rests with Congress.
Federal lawmakers have shown little interest in tax fairness until recently. The momentum created by bipartisan state action has begun to generate increased support in Congress, although many lawmakers, especially those from high tech states like California, Massachusetts, and Virginia, remain strongly opposed.
Among supporters of tax equity, two general camps have emerged. One, led by Senator Byron Dorgan and supported by state government associations, favors a bottom up approach that would allow states and localities to continue to decide whether to levy a sales tax at all, and if so, what to tax and at what rate. The other, led by Senator Ron Wyden and favored by most national retail chains, would impose a uniform rate of taxation on all states.
Supporters of sales tax fairness had hoped to push forward legislation this month by tying it to the renewal of the Internet Tax Freedom Act. The ITFA, which expires on October 21, bans certain internet taxes, such as access fees (but does not prohibit or affect internet sales taxes). In the wake of the September 11 tragedy, however, it now seems more likely that Congress will simply extend the ITFA for several more years and shelve the sales tax issue until a later date.