Sales tax
for Internet sales is quickly becoming an issue advertisers
and affiliates must begin to pay attention too. With the
moratorium on Internet sales taxes ending in October,
Congress is once again trying to resolve how state sales
taxes should be assessed on products bought online. Two
pieces of legislation proposed in the U.S. Senate propose
two approaches to interstate sales via the Internet:
https://www.lynxtrack.com/signup.php
* A
new uniform system for states to use in assessing sales tax
on goods bought through the Internet.
This will require a massive database and technology upgrade.
* A ban on sales taxes except when the
customer and the company are in the same state.
Multiple senators and representatives have
proposed other bills that all try to extend the moratorium.
Jerry Terry of the National Taxpayers Union, a conservative
group advocating for lower taxes, says the worries about
Internet sales taking away from local business are
overstated. Internet and local retailers have benefited from
the recent economic boom.
Any advantage an Internet retailer may gain
by not having to enforce a state sales tax is negated by the
shipping fees they must charge, according to Terry.
Michael Mazerov, a senior fellow at the
liberal Center on Budget and Policy Priorities, counters
that one of the plans on the table could clear the way for
consumers to avoid paying a sales tax, no matter where a
retailer is located. Mazerov says a company like K-Mart
could help customers avoid paying a sales tax by separately
incorporating its online purchasing division.
He describes how customers could go into a
store, browse for what they wanted, and then purchase the
items online at a computer in the store. Because the
customers would be buying the product from a subsidiary with
a warehouse in a different state, they would avoid paying
the state sales tax.
Last September, California Governor Gray
Davis vetoed a bill that would have prevented California
retailers that created a subsidiary to handle online orders
from avoiding a sales tax. Will all of the States and
Federal Government be able to put together a fair system
that taxes Internet sales? Further, are consumer exempt from
sales tax right now?
The long answer is that in most cases you're
not really exempt today from sales taxes on Internet, mail
order and other out-of-state purchases; so legally speaking
you're not saving that money. The more appropriate
description may be "dodging the tax collector."
A 1992 U.S. Supreme Court ruling forbids
states from forcing businesses elsewhere to collect their
sales taxes unless the company has a physical presence in
that state. Instead, most states simply require their
resident taxpayers to pay them directly in the form of a
"use tax." Few consumers actually do, but states are
starting to crack down.
Last year, New York and California joined
nearly two dozen other states with a use tax line or a
separate form included with annual income tax returns.
Consumers who fail to pay the tax risk penalties if audited.
States also have cooperative agreements and
share information on goods shipped across borders. Some have
been known to send bills to consumers who failed to pay such
taxes on high-value items such as furniture, fur and
jewelry. But states acknowledge that they can do only so
much to go after consumers, she said. At some point, the
costs outweigh the revenues.
Nonetheless, under conservative estimates by
researchers at the University of Tennessee, states and local
governments lost $15.5 billion in sales tax revenues because
of Internet sales. The loss is projected to increase to
$21.5 billion by 2008 as e-commerce continues to grow.
Meanwhile, bricks-and-mortar retailers that must collect
sales taxes increasingly complain they cannot compete
against businesses that do not.
So, to elaborate on the "short" answer, there
will be more pressure on e-tailers to collect the revenues
on behalf of states. Several states, under the Streamlined
Sales Tax Project, are working on incentives for e-tailers,
many of which complain they can't keep up with tax
requirements in more than 7,500 state and local
jurisdictions. Since 2002, states have been adjusting their
tax laws to come up with uniform definitions, so that bubble
gum won't be considered candy in one state, food in another.
Software will be provided so retailers can determine the
proper state and local rates by simply entering a nine-digit
ZIP code. Retailers also will have a uniform tax form to
file taxes online to multiple states.
Washington state and Texas, for instance,
need to change laws so tax rates are based on where a
consumer lives, not where a product is sold. That could
significantly affect local revenues where Amazon.com Inc.
and Dell Inc. are located. These laws and changes will
directly affect the affiliate market. The affect will come
in the form of passing on the cost of tax to the
consumer and if that is not possible the affiliates who help
market the products will get hit. However, clearly this will
require a massive change for advertisers who we all work
with. The result will be some kind of technology solution
allowing advertisers to place a tax on goods and making sure
sales that occur from affiliates or otherwise are properly
taxed.
Retailers will be given amnesty for any
sales taxes they might have previously failed to collect if
they voluntarily join within a year. Beyond that, states and
local governments will lobby Congress for authority to
require participation.
The revenue loss is becoming so large, and
the competitive disadvantage for a local merchant that does
have to charge the tax is becoming so significant that
states are more and more mobilized along with brick and
morter stores. The loss hurts states who depend on this
funding for social programs. But there's no need to rush to
the mouse quite yet: Change is not likely to be quick.
David Fishman
dfishman@wrpmedia.com
