Earlier this month, the California Senate passed a bill requiring internet vendors to collect customer sales taxes for purchases made on their sites. The bill greatly expands—beyond what most would consider reasonable—the description of what constitutes having a business presence in the state, to include the mere presence of service representatives.
If this bill becomes law, it could be the first in a wave of similar bills from states desperate to solve their economic woes through ill-advised Internet taxation regulations. That could make an already confusing situation for online merchants a lot worse.
Merchants should be alarmed by this prospect, but they should also acknowledge that such legislation is in large part a result of their actions—or better, inactions—in collecting taxes they can collect.
Thanks to automated tools that have been on the market for a while, e-commerce sites can track user activities to predict future purchases, manage promotions and discounts, and suggest related items. Readily available software can handle the sales tax for the states in which a business has a presence. With XML and Web services, its even easier now to maintain accurate sales tax data from states.
Automated software can easily handle this task, even for businesses that have physical presences across the country. And groups such as the Streamlined Sales Tax Initiative (www. streamlinedsalestax.org) are working toward making this even easier by simplifying tax codes.
Online merchants, if theyre not already doing so, should begin collecting customer sales taxes for all the states in which they have a presence. And we recommend against playing games. Barnes & Noble, for example, claims that its online store is a separate company from its brick-and-mortar stores. That sort of maneuver has led states such as California to make the definition of having a presence so broad that almost no business can claim to not have one.
If businesses identify the states where they have legitimate presences and pay the taxes in these states, theres a good chance most states will be less likely to copy Californias approach, in which simply certifying an independent repair shop to service your products can be considered a business presence. The situation could get worse. Imagine having to deal with 51 different state laws.
A federal law isnt the answer, either. While this could simplify collection, it could also cause problems, including collecting sales taxes in states that dont now require them.
Again, state sales tax collection is a problem technology can handle. Theres no need to risk a potentially damaging federal law. Lax enforcement has led some Internet merchants to believe their business is qualitatively different from that of other merchants. But Internet commerce is an integral part of our economy now. Internet merchants must accept responsibility and collect sales taxes as other merchants do.