Net Proceeds

By simplifying their sales-tax system, states hope to convince online retailers to play taxman. Nevada is taking a proactive approach to making that happen.

by / March 30, 2001
The rise in e-commerce has been cheered by numerous sectors of the marketplace: consumers who enjoy getting books and CDs delivered to their doorsteps; investors who still see long-term growth potential; and manufacturers who expect B2B portals and auction sites to enable more efficient production and distribution in the years to come.

But bricks-and-mortar retailers have complained that e-commerce vendors enjoy an unfair advantage in the marketplace because consumers purchasing goods online dont pay sales tax unless they reside in the same state as the seller.

At the same time, states have declared that theyre losing millions in uncollected sales taxes on purchases made over the Internet. With growth in online sales outpacing growth in the retail market as a whole, the states forecast dire tidings for future budgets if the situation remains unchanged.

A University of Tennessee study published in last Decembers National Tax Journal estimates that the 45 states that impose sales tax lost $1.2 billion in revenue on Internet purchases in 1999 and predicts that those losses will reach $10.8 billion by 2003. "Every state is noticing a decrease, at least in the rate of growth of the sales tax, because of online remote sellers," said David Goldwater, assemblyman from Nevadas 10th District and chairman of the Assembly Taxation Committee.

Collecting Change

To recoup lost revenues, representatives from 29 states have worked together over the past year to create a tax-collection system thats designed to be easier for all retailers to negotiate, whether online, mail-order or based in the real world (see "Rewriting the Rules", January 2001).

The new system is laid out in the Streamlined Sales and Use Tax Agreement, which was negotiated by the state representatives and members of the National Conference of State Legislators (NCSL) and the National Governors Association and agreed to in December. As written, the agreement will bring about uniform tax rates within each state, uniform definition of goods, a one-stop vendor registration system and fewer vendor audits.

By doing so, the states hope to undermine some of the reasoning behind the Supreme Courts 1992 Quill decision, which was held as a victory for mail-order catalog companies. "[The court] said that states cannot force an out-of-state vendor to collect sales tax because of the complexity of the state sales-tax system, the burden that it is to an out-of-state vendor and the cost," said Neal Osten, director of commerce and communications at the NCSL. "Those are the things weve been trying to address in the simplification legislation: reducing the burden, reducing the complexity, reducing or eliminating the cost and creating a uniformity between the states."

Nevada is taking a proactive approach in response to the Streamlined Sales and Use Tax agreement. Goldwater plans to introduce a bill based on the agreement in Nevadas 2001 legislative session. "The technology that well overlay with the transaction will actually collect that tax," he said. "The retailer is removed from the tax collection business."

Nevadas Gov. Kenny Guinn has already pledged support for the bill, but Goldwater knows that wont necessarily make its passage any easier. "The politics of putting the two words Internet and taxation together creates a difficult public relations hurdle," he said. "But when you tell people that youre talking about teachers, firefighters and public employees and services, and you bring up the issue of fairness -- that Nevada businesses are not treated fairly in this system -- then they want change."

The fairness issue surfaces repeatedly in the Internet-sales-tax discussion. "Nevada businesses should not have a tax system thats biased against them. They should have a tax system that favors them, or at least is equal."

Encouraging Volunteers

No matter what kind of bill is passed by Nevadas legislature, change is still a long way off. In its 1992 Quill decision, the Supreme Court ruled that a business must have a physical presence, or "nexus," within a state to collect sales tax. Although the agreement addresses some of the concerns that led to this ruling, by no means does it negate it.

"Either Congress [which regulates interstate commerce] would have to give us the authority to require out-of-state vendors to collect, or the Supreme Court would have to overturn their decision," said Osten. "Both of these are not likely, so states need to show vendors that we are serious about simplifying, about reducing the burden. Hopefully, well be able to make the case to Congress in the future."

Until that time, the collection of sales tax by Internet and mail-order vendors without a store or warehouse in Nevada will continue to be voluntary. The University of Tennessee study estimates that Nevada will lose $102 million in sales tax revenues in 2003, but theres no way to determine how much of this would come in under the new law -- or whether that figure is even accurate to begin with.

"I dont know that anybody can determine actual figures," said Donald Bruce, research assistant professor at the Center for Business and Economic Research and co-author of the University of Tennessee study. "We can look 10 years back and 10 years from today and still be estimating because its impossible to determine which portion of e-commerce is taxable and which share has already been complied with. Youre going to have to make assumptions."

Goldwater said that sales-tax collection under the new law will be dictated by the compensation that the retailers and their service providers receive for their efforts and those values have yet to be determined. "If [the compensation is] reasonable, youll see a great deal of participation because it will allow the retailer to get out of the business of collecting taxes, it will allow the retailer not to be subject to audit, and it will significantly relieve the inner administrative burden of sales tax from the retailer," he said.

Retailers will more likely collect sales tax if a large number of states adopt the same system, because the cost of collecting within each additional state will be reduced. Achieving identical systems might be a challenge since legislators love to tinker with bills, said Osten, but the Streamlined Sale s Tax Agreement should be able to withstand some customization. "While were trying to reach simplicity and uniformity, were flexible enough that states are not kept out of the system because theres a certain issue thats unique to that state," he said.

Sidestepping the Feds

Legislation at the state level is pointless because the federal government has introduced legislation that would extend the moratorium on new Internet access fees and new state and local taxes that target the Internet. There appears to be a conflict here.

Actually, the moratorium would have no effect on implementation of the agreement. "There are no new taxes, no access taxes, no taxes on general sales that dont meet the current taxation system of sales," said Goldwater. "Its applying the current sales- and use-tax laws to electronic sales."

Although the collection of sales tax by out-of-state vendors would remain voluntary, that hasnt stopped some opponents from decrying the agreement as a money grab by spendthrift legislators.

"This is about hoovering up every bloody penny out of peoples pockets that they can possibly get their hands on," said Sean Duffy, president of the Commonwealth Foundation. "Too many politicians are utterly fixated on revenues coming in, because then theres more to spend."

Politicians, on the other hand, argue that theyre merely trying to collect revenues that should be coming in but arent, such as the use tax consumers are supposed to pay when sales tax isnt collected on goods they purchase. "In most cases, the consumer doesnt forward that money to the state," said Osten.

If the states can smooth over their individual tax quirks with the Streamlined Sales and Use Tax Agreement and convince online retailers to take on the role of tax collector, theyd be rewarded with a wealth of "found" money. Look for them soon in the front row of the e-commerce cheering section.