Online Sales Tax Accord Eliminates Barrier For RetailersOnline Sales Tax Accord Eliminates Barrier For Retailers

Conventional wisdom suggests that online retailers have a competitive advantage in not charging sales tax to customers, because the final price they offer is less than real-world stores charge for the same merchandise. That's why the recent agreement by 10 online retailers with 38 states to collect sales taxes from customers seems counterintuitive. Yet that's exactly what the online units of Wal-Mart, Target, Marshall Field, Mervyn's, Toys "R" Us, and five other dot-com merchants did in exchange for not being held liable for previously uncollected taxes on Web sales.

Not collecting sales or use taxes from online customers had become a barrier for retailers as they strive to blend their assorted channels--brick-and-mortar stores, Web sites, mail-order catalogs, and phone centers--into a unified entity for their customers.

Under prevailing conditions, retailers couldn't easily let customers return or exchange merchandise at their outlets for items purchased online sans tax payment. Likewise, they couldn't deploy in-store kiosks where customers could bypass paying sales tax by having goods purchased on the Web-linked terminals without facing potential tax liabilities. "The competitive advantage of not collecting use tax seems to be outweighed by restrictions they operate under in order not to collect use tax," says John Coalson, an Atlanta tax lawyer who represents some of the merchants that reached the deal with the states.

As word of the agreement between the 10 merchants and 38 states began to circulate, a number of businesses have contacted Coalson to inquire about joining the accord. Coalson says he expects even more interest from business as a consortium of 40 states, known as the Streamlined Sales Tax Project, implement a centralized Web-based IT system to collect sales taxes from online customers and distribute them to 7,500 state and local taxing authorities. "More and more remote sellers are willing to collect taxes if the system is simplified and there is no retroactive liability," Coalson says. "If states are successful in getting the streamlined agreement approved, you will see more remote sellers begin to collect taxes. Almost all remote sellers have brick-and-mortar affiliates and they want to integrate their businesses."

Wisconsin tax administrator Diane Hardt, the co-chair of the Streamlined Sales Tax Project, sees such a system being operational by year's end. Bills have been introduced in at least six state legislatures, with lawmakers from another 31 states working on draft legislation to implement the program. The program takes effect once 10 states enact legislation authorizing the project. When that happens, something Hardt believes could happen by late spring or early summer, the consortium will seek bids to build the system.

Simplifying the system could provide a windfall to states: A congressional study estimates that they lose nearly $13 billion annually on untaxed Internet sales.

A decade ago, the Supreme Court exempted businesses from collecting sales tax from out-of-state customers because the paperwork involved was deemed too onerous. But supporters of the project, including many retailers, say the new system would eliminate such burdens on companies, which could lead the court to reverse its earlier decision or Congress to do so by law.

Right now, companies register with each tax jurisdiction, a process that itself is quite taxing. When the project becomes operational, businesses would register once online, and the consortium would forward information and payments to participating states. Businesses could use outsourcers, software, or proprietary systems to link to the central system.

Each state continues to decide for itself what items are taxed. But the project establishes definitions for taxable items that all participating states must accept to participate in the voluntary program. That's a primary focus in debates in state legislatures. But that makes it easier for businesses to identify products that must be taxed.

For example, some states tax soft drinks but not juice--Wisconsin taxes juice drinks that contain less than 100% juice. But the project decided to define juice as any drink containing at least 50% juice. Thus, Wisconsin would have to exempt drinks containing at least 50% from its 5% sales tax to participate.

Such changes in definition could cost Wisconsin about $2.5 million in tax revenue. But simplifying the system could provide Wisconsin and other states with a windfall. Indeed, the agreement will add $400,000 to state coffers, a paltry sum considering the state loses upward of $250 million a year in uncollected sales taxes from citizens buying online and by mail order. Still, Hardt contends, "it's a step in the right direction. It shows that businesses support what we're doing."