Tax-Free Web Purchases to End?

WASHINGTON, D.C. -- So you run a business in California and a consumer in Nebraska makes a purchase online. No sales tax is charged because they're out of state. And everyone's happy, right? Well, that all may end soon with the introduction of a new bill that could arrive in Congress as soon as Monday.

Pushed by state politicos, major retailers and of course, tax agencies, the legislation would put an end to tax-free Internet shopping as well as other mail-order sales.

This would mean adult novelty or DVD retailers dealing in online and mail-order purchases out-of-state would be among those expected to fully comply with new tax-collecting guidelines. 

As CNET reports, state governments and their tax boards have long been asking Congress for a law that eliminates tax-free Internet purchases. Officials argue it takes money away from infrastructure such as schools and police (always emotional button-pushers when brought up) and also say it's only fair that online businesses collect and pay their share of taxes, just like local stores. 

Under current laws, it falls on purchasers to report and pay the sales tax, or a "use tax." But how many really do that? So states say they are the losers.

For example, the Board of Equalization in California claims a tax loss of $1.34 billion in 2003 because residents didn't pay those use taxes and says $208 million is linked to online purchases.

With the current economic downturn, the National Conference of State Legislatures, which has pushed for the elimination of tax-free Internet commerce for some seven years, may soon get its way.

According to a study by the Rockefeller Institute indicates sales tax revenues have declined by just over 6.1 percent -- the largest drop in half a century, reports the Wall Street Journal.

The new legislation will likely be introduced by Wyoming Republican Senator Mike Enzi and Massachusetts Democrat Rep. Bill Delahunt, both past advocates of similar proposals. Opponents of any such bill include the Direct Marketing Association, the Electronic Retailing Association, and online-entrenched companies such as eBay, L.L. Bean and Part of the problem, detractors argue, are complex tax codes regarding what should or should not be taxed, coupled with more than 7,000 tax agencies in states, counties and cities, all with different codes.

The U.S. Supreme Court has ruled that for the most part, out-of-state retailers do not have to collect sales taxes unless Congress changes the law, leaving it in the hands of politicians, and lobbyists, of course.

However, CNET notes, if a company based, in say, New York, but had enough of a "business presence" in California, it could be forced to collect sales tax. Another exception to the no sales tax for out-of-state companies is cigarettes.

Meanwhile, more than 20 states are backing a proposal called the Streamlined Sales Tax Agreement, created in 2002 to simply colliding tax laws around the country. Proponents plan to lobby Congress on May 13.

The National Retail Federation claims its membership fully supports the changes.

"The sooner we can get it done the better, as far as retailers are concerned," said Maureen Riehl, the group's vice president of government relations

Well, either online retailers don't belong to the NRF or weren't asked their opinion, according to NetChoice, whose members include AOL, eBay, NewsCorp, Oracle, Verisign and Yahoo. 

"The states are desperate for new revenue and I think they realize they're straying far from the simplification they originally promised," said NetChoice's executive director, Steve DelBianco. "That creates an urgency on their part -- to get the federal mandate before it becomes clear they have no real intention of simplifying or compensating sellers for the burdens of collecting."

The problems include multi-state audits, when the home state of business should only be involved, DelBianco said, adding greater tax-collection pressure will be placed on small businesses, possibly crushing them while major operations will endure.

"There has to be some oversight," DelBianco said. "Only the U.S. Congress is going to be able to protect sellers from unreasonable burdens."

Meanwhile, many states are also moving to tax digital downloads, just as CDs, DVDs and video games are taxed in retail stores at the local mall or Wal-Mart or Target.

While such a proposal was recently shot down in New York, a measure will go into effect in Mississippi July 1, implementing a sale and use tax on digital products such as movies, audio content like music and ringtones, and also digital books. Numerous other states such as Washington, Minnesota, North Carolina and Vermont also are examining similar new digital-related taxes in order to pump-up revenues.

These measures are certainly matters of a concern for the adult industry as it becomes ever more Web-based for content sales and services.