by Loretta Radeschi

Uncle Sam and the E-Commerce Tax

 

FOR MORE INFORMATION

For additional information about the Internet Tax Freedom Act, and the Streamlined Sales Tax Project, visit:

For a list of state tax agencies, visit:

n November 2001, President Bush signed a bill to extend the Internet Tax Freedom Act (ITFA) for two more years. The law extends the moratorium on new, special and discriminatory Internet taxes through Nov. 1, 2003. Under the ITFA’s definition of discriminatory taxes, sales transacted through e-commerce are to be treated the same as catalog or mail-order sales. For sales where the buyer and seller are in the same state, a state can require the seller to collect sales tax from the buyer and remit it to the state. For interstate sales where the seller has a physical presence in the buyer’s state, a seller can be required to collect the “use tax” (the companion tax to the sales tax applicable to interstate sales) from the buyer and remit the revenue to the buyer’s home state government.

“The rationale behind the ITFA is to allow time for study during the infancy of e-commerce to help ensure fair and workable rules that won’t impede growth of the Internet,” says Annette Nellen, CPA, Esq., and accounting and finance professor at San José State University. “Reasons against the ITFA include concerns of the federal government restricting state and local action, and singling out one type of commerce for special treatment,” she adds.

A logistical nightmare

Internet sales, under present rules, can cause significant revenue losses for many states. Forty-five states and the District of Columbia impose sales taxes on purchases made within their borders. Those taxes, according to the Congressional Budget Office, account for about 33 percent of the total tax revenue in those jurisdictions. Thirty-three of the states that have sales taxes also allow counties and municipalities to impose additional sales taxes. Only Alaska, Delaware, Montana, New Hampshire and Oregon do not have a sales tax.

“If vendors selling products to consumers in multiple states were required to collect sales tax on the sales, complying with the rules of each state and various municipalities, it would be time-consuming and expensive,” says Nellen. “That is why the U.S. Supreme Court stated in Quill v. N. Dakota (1992) that vendors had to have a physical presence in a state before a state could make them collect sales tax (so as not to violate the commerce clause of the U.S. Constitution).”

According to Congressional Budget Office Assistant Director for Tax Analysis C. Thomas Woodard, testifying before the Senate Finance Committee in August 2001, the United States General Accounting Office estimates sales tax losses from purchases over the Internet in 2003 could be as high as $12.4 billion. Although imprecise, estimates of the erosion of the sales tax base are large enough to generate debate within the states about what should be done to deal with their lost revenue. “Generally, states have indicated that they want Congress to grant them the authority to require remote sellers to collect sales taxes,” added Woodard. “Some observers of state tax policy suggest that in exchange for that right, states could change their tax systems to reduce remote sellers’ compliance costs.”

“The presence of over 6,000 jurisdictions in the U.S. capable of assessing sales tax calls for simplification and clarification of when these taxes can be assessed so that small businesses do not shy away from the market potential of the Internet due to tax compliance concerns,” says Nellen.

To that end, several states that levy sales taxes have embraced the Streamlined Sales Tax Project (SSTP), which calls for 46 sales tax rates — one for each state that imposes sales tax and the District of Columbia. “The SSTP would simplify the process for vendors because they could have an agent collect the tax or use a special software system (apparently with much of that cost covered by the state),” says Nellen.

“The SSTP approach would require craft vendors selling to customers in multiple states to use the agent or special software, unless a deminimis rule is also added, such that no compliance would be required if sales in the state were below a specified dollar amount,” she adds.

Echoing sentiments of many craft artists, basket maker Arlene Zaloznik of El Paso, Texas, who sells her baskets over the Internet and at shows in New Mexico, questions the simplicity of the SSTP. “I can imagine it would be tedious to have a sales tax license for potentially all 50 states and have to keep track of each due date — it would be overwhelming.”

While several states have passed some version of the SSTP, it is likely up to Congress to determine what happens. Before Congress takes further action on allowing an Internet sales tax, questions that might need to be answered, according to Nellen are: “How many states have to adopt the system and is it simplified enough that Congress would reverse the Quill decision? Or, how many states would have to be using the system in order for the Supreme Court to find that SSTP states could make nonpresent vendors collect sales tax without violating the U.S. Constitution.”

The ITFA extension was the culmination of a lengthy debate in both houses of Congress on the role of the federal government in state sales tax. Those opposed to taxing e-commerce floated proposals to make the ITFA permanent. Those supporting taxation pushed for a commitment on the part of Congress to grant states the power to enforce sales tax collection, if
the states simplify compliance. “The two-year extension should be viewed as a compromise,” says David Hardesty of EcommerceTax.com.

 

Loretta Radeschi is a Pennsylvania-based writer who has written extensively about fine crafts. She is the author of “This Business of Glass,” and “The Business Guide Series for Artists and Craftspeople."

 

APRIL 2002: TABLE OF CONTENTS