Internet Sales Tax on the Horizon

Mandatory sales tax on Internet purchases isn't here… yet.

The Streamlined Sales Tax Project may sound to some like the states are getting ready to start charging state sales tax on all e-commerce purchases, but the reality isnt that simple.

What the SSTA (Streamlined Sales Tax Project), a group of U.S. states united in trying to simplify state and local tax collection, is doing is setting up a system by which Internet e-commerce companies can voluntarily pay state taxes to the states in which their customers reside.

The carrot that the SSTA is offering companies that agree to do this is that, rather than try to work out how much tax a company owes for each locality they can instead use a CSP (certified service providers).

In addition, "the states that are in compliance with SSUTA (Member States) will offer advantages to those sellers who use a CSP.

One such advantage would be that the states would offer amnesty "from assessment for uncollected or unpaid sales or use taxes together with interest or penalty for sales made during the period the seller was not registered in the state."

More minor advantages are that such companies will receive free tax collection and remittance software.

Some states have already gone farther in trying to encourage e-commerce companies to pay state sales taxes.

North Carolina and South Dakota, for instance, will purchase goods and services only from companies that collect state sales taxes. Thus, if a company wants to do business with those state governments, it must collect their sales taxes.

The full members of the SSTA at this time include Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota and West Virginia. The associate-member states are Arkansas, Ohio, Tennessee, Utah and Wyoming.

Since 1992, a still valid Supreme Court decision ruled that companies do not have to pay sales taxes in states where they do not have a physical presence.

SSTA hasnt addressed this problem at this time. A related problem is if a company located in one state sells a product to someone in another, which state collects the sales tax? Other issues, like sales of non-material goods such as downloaded music, remain unaddressed.

In addition, many e-commerce companies have long maintained that it places an unfair burden on them to require them to file dozens of sales-tax returns under widely varying state and local tax laws.

/zimages/6/28571.gifRead more here about the debate over Internet sales tax.

Last, but in no way least, the Congress has yet to rule that the states can collect such taxes. Internet services cannot, at this time, be taxed by the states under Federal law.

All that said, the momentum is on the states side according to John Logan, senior state tax analyst for CCH Inc., a leading provider of tax and business law information and software.

While "Internet retailers wont be required to collect sales or use tax from their customers, the SSTA has made it easier for them to voluntarily collect the use tax from their customers," Logan said.

Online retailers have long fought against such moves. Theyve done so both because of the aforementioned complexity of the various states tax codes and because whichever company would first require its customers to pay sales taxes would face a competitive disadvantage.

Now, however, "the larger retailers are beginning to believe that paying state sales taxes may be inevitable and that by co-operating now it could eliminate some exposure."

This is not say that state sales tax on Internet purchases is a done deal. "Theres still a lot of opposition," said Logan.

"Its the long-term hope on the part of the states that their actions will send Congress a sufficient strong reason to authorize SSTA complaint states to require companies without physical presence in their states to collect taxes."

"Legally," Logan noted, "purchasers of goods over the Internet have always been required to pay sales tax on their purchases, but as a practical matter, many havent, and this will be seen as a tax increase."

Thus, in the end while the current move is purely voluntarily, Logan said that "if a critical mass of retailers buy into this, a lot more will follow, and it will snowball into almost all Internet retailers."

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