States, Stores Make Online Sales Tax DealStates, Stores Make Online Sales Tax Deal

Think you'll avoid paying sales tax on that DVD player you bought at Walmart.com? Think again. Wal-Mart, Target, Marshall Field, Mervyn's, Toys "R" Us, and five other retailers agreed this week to start collecting sales tax for merchandise sold online. In return, 38 states and Washington, D.C., won't hold the retailers liable for previously uncollected taxes on Web sales.

For Wisconsin, the week's agreements would add $400,000 to its coffers, a paltry sum considering the state loses at least $200 million annually in uncollected sales tax from citizens buying online and by mail order. "It's a step in the right direction," says Wisconsin tax administrator Diane Hardt, co-chair of the Streamlined Sales Tax Project, a consortium of states creating a centralized system to collect sales taxes from online purchases. "It shows that business supports what we're doing."

On Wednesday, a study by Internet research firm Jupiter Research concluded that many online retailers are losing money by avoiding sales-tax collection.

The study debunks retailers' belief that online shoppers would click to another site as soon as they discovered purchases carried a sales tax. Jupiter found that only 46% of consumers were aware that they could avoid the levy by searching for a tax-free site.

Of those savvy shoppers, 61% didn't go out of their way to avoid a sales tax. In addition, only 9% "always look" for nontax sites, and 30% "sometimes look" for the better deal.

So what does this mean? Online retailers are missing out on the lucrative benefits of integrating online and store operations to avoid something that's not a major concern to shoppers, Jupiter analyst Juliana Deeks said. Most retailers avoid online sales taxes and remain legal by keeping the virtual and brick-and-mortar worlds separate.

But failing to combine the two sales channels prevents companies from offering customers services that are a real competitive advantage, the report said. For example, retailers could coordinate marketing and customer-loyalty programs between the two channels, including two-way notification of sales and events. Customers could buy online and have the option of picking up or returning merchandise in the store. Purchasing data from both channels could be combined to provide better information on buying habits and trends for more-effective marketing campaigns.

All of that means retailers are losing the opportunity to increase spending among customers.

"The benefits of multichannel integration overwhelmingly outweigh the importance of sales-tax avoidance," Deeks said. "Retailers should not hold back on integrating channels because it compels them to collect sales tax."

However, there's one caveat to the study's conclusion. Men are more aware of sales tax charges than woman, the study found. The reason: Men are much more likely than women to buy expensive items popular among Internet shoppers, such as computers and consumer electronics.

"Multichannel retailers with high average-order sizes of taxable goods are less likely to gain such a clear advantage from multichannel integration and must weigh the risks associated with charging sales tax much more carefully than retailers with low average-order sizes," the study said.

A retailer with a separate online entity is exempt from collecting sales tax because of a 1992 Supreme Court decision that blocks states from collecting taxes from catalog, telephone, or online sales unless the retailer has a physical presence in the state. Of course, combining the divisions would require sales-tax collection.

However, Jupiter believes state legislatures, which are facing severe budget deficits in the current economic slump, will eventually convince Congress to pass an online sales-tax law. "It's inevitable that a sales tax will become mandatory, probably over the next five years," Deeks said.

State tax officials and lawmakers are working on addressing the Supreme Court's concern that tax collection wasn't possible because of a lack of standard definitions for taxable goods and services, and because there's no single statewide tax rate for each category of product. Besides varying tax rates, many states differ on whether, for example, chocolate is taxable candy or nontaxable food.

Last November, tax officials and lawmakers from 30 states approved a plan, called the Streamlined Sales Tax Project, that would address the concerns of the high court and pave the way for congressional action.

The General Accounting Office, the investigative arm of Congress, estimates the more than 7,000 tax jurisdictions in the United States, including 45 states and Washington, D.C., lose $13 billion in revenue annually because of the sales-tax ban. A University of Tennessee study found that amount could grow to $45 billion by 2006.