State sales taxes on the online purchase of goods might move a step closer to reality when 13 states begin encouraging businesses to collect this fall.
Standing behind the move is the Streamlined Sales Tax Project, a 5-year-old coalition of 43 states and the District of Columbia created to develop a set of unified tax rules and definitions between the states.
Of course, standing in the way of making the state sales taxes mandatory is the U.S. Supreme Court, which ruled in 1992 that states couldn’t force businesses to collect their sales taxes unless the businesses were located within that state. In the decision, the Court noted the many differing tax jurisdictions and definitions of taxable goods.
The coalition, however, hopes to overcome the ruling through a set of unified rules and appeal to the federal government to pass a law overruling the Supreme Court that would make sales tax collection mandatory.
Although any such appeal and law will take some time, if state taxes are foisted upon Internet merchants, what will be taxed will be determined on a state-by-state basis.
“State legislators still decide what is taxable or exempt in a state,” said Diane Hardt, a co-chair of the project and Wisconsin’s tax administrator. “Some states tax only tangible personal property. Some states tax tangible personal property and select services. A few states tax all tangible personal property and all services.”
In order to be part of the project, each of the initial 13 states encouraging online merchants to collect had to change their tax laws so they mirrored one another. However, what the states tax is entirely up to them.
“There is nothing in the project that imposes a tax on any particular item or service,” said Bruce Johnson, a member of the project steering committee and the Utah tax commission. “The project really imposes uniform rules and definitions that individual states will then use in applying their own laws. Utah does not tax website memberships now and will not under Streamlined Sales Tax. I suspect most states do not. There may be some states, such as South Dakota and Hawaii, that have broad gross receipts taxes that may tax such memberships. If so, they could continue to do so under Streamlined Sales Tax.”
As expected, people aren’t exactly jumping in line to pay state sales taxes anyway.
“Certainly at Amazon, we have no plans to volunteer,” Rich Prem, top tax official at Amazon.com, told the Associated Press.
While the online retailing giant is open to working with state and federal legislators, the company seems to have doubts about the ability to make a system that is both simplistic and fair.
Meanwhile, the Streamlined Sales Tax Project has tried to simplify collection by creating software that calculates different taxes for different states and has promised to pay for special service providers that could bill customers and file and pay taxes.
In addition, the states are offering, in the form of a thinly veiled threat, businesses that start collecting taxes this year a yearlong amnesty from the possibility that the states might seek back taxes businesses owe for online purchases.
Currently, online consumers are expected to pay sales taxes on their purchases directly to the state when they pay their income taxes.
States encouraging merchants to start collecting this fall are reportedly: Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota, and West Virginia. Arkansas, Ohio, Tennessee, Utah, and Wyoming are expected to modify their laws and join the others over the next few years.
