Internet Sales Tax Update

Are the days of no sales tax on most purchases made over the Internet about to change and disappear forever? Frankly we are closer to that happening than ever before. A powerful alliance of politicians, including key U.S. senators and the National Governors Association, is arguing that out-of-state retailers must be required to charge sales taxes on purchases. Companies like Amazon.com, based here in Washington state, are only required to collect sales made to customers in this state. Most of its many millions of customers in other states pay no sales tax on their purchases.

Of course, there is nothing new here that we haven't heard before. Members of the the governors' association have been pressing Congress to enact such a law for at least six years. They invoke arguments, which have been unsuccessful so far, like saying that reduced sales tax revenue threatens budgets for schools and police. Of course, what has changed to make this a more likely possibility is the political dynamic. The Democrats now control both houses of Congress and they are seen as more likely to agree to the idea than one controlled by Republicans.

"When you have a Democratic majority in Congress, that Congress will be more friendly to imposing new burdens on business if it means additional tax collection," said Steve DelBianco, executive director of the NetChoice coalition, which counts as members eBay, Yahoo and the Electronic Retailing Association. They, of course, oppose the sales tax plan.

Another factor that could tip the scales in Washington, DC in favor of the pro-sales tax forces is a concept called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of the notorious convolutions of state tax laws. If that ever happens, they believe it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers. There is very little doubt that some form of a mandatory sales tax collection law will be introduced in Congress very shortly.

Pro-sales tax lobbyists say state governments lose over $15.5 billion dollars annually from non-taxed Internet sales. They also say that local small businesses suffer because they do have to collect sales taxes and on-line retailers do not. While all states that have sales taxes also have a Use Tax that requires residents to pay taxes on purchases where no sales tax was collected (or if the purchase was charged an out-of-state sales tax that is less than their home state taxes) very few people pay it and state enforcement of these laws is spotty at best.

Of course, a sales tax law that would cover Internet sales would have to be modified a great deal to cover the differences in each states sales tax laws. For instance, while Washington residents don't pay sales tax on food, Idaho residents do.

All this may make for some interesting times ahead on this issue and we plan to watch it closely and will let you know when something important happens.

PS: Don't confuse this sales tax issue to the debate over the Internet tax moratorium, which only limits taxes on access charges such as DSL or dialup connections. Congress renewed the ban in 2004, and it expires this November.