Taxing Issue: Internet Sales Tax Legislation

By Staff Writer

In 1998, Congress debated the Internet tax collection issue but ultimately delayed dealing with it by issuing a three-year moratorium when, it was planned, a fair and efficient process would be implemented. So far, that mandated process has yet to be developed. Many solutions have been suggested, but none suggested thus far have been either enforceable or effective.

The Issues
When you operate a brick-and-mortar business, taxes may be a headache every April 15th, but one rule remains: they aren’t optional. If your run shop in Indiana, you collect Indiana sales taxes. Yet when you own an online business, the lines are blurred. Because of the 1992 Supreme Court ruling that states cannot cross their borders to collect taxes, you can only collect sales tax online from customers living in your own state.

To make matter even more confusing, it’s been proposed (and tried) that companies charge sales taxes on an individual state basis. For example, if you’re based in Indiana, you charge customers who are New York residents the New York state sales tax—and then send New York the money. Under that system, you could end up filing returns and writing checks to all 50 states. And you thought regular taxes were a headache!

According to the Government Accounting Office, states are losing as much as $13 billion a year on untaxed Internet transactions, a number that’s expected to go as high as $45 billion by 2006.

The question isn’t whether or not the states need the income—they do. The recession of recent years is expected to lead to a $40 billion collective state deficit in fiscal 2003, and mandated Internet taxes could make major changes. According to the Government Accounting Office, states are losing as much as $13 billion a year on untaxed Internet transactions, a number that’s expected to go as high as $45 billion by 2006.

To make up for some of that lost money, some states have instituted an honor system, where citizens are asked to volunteer sales taxes for online purchases. Not a bad idea to make up for a few dollars here and there, but hardly a viable solution.

Under the Streamlined Sales Tax Project, states can agree on their definitions of taxable goods as well as the tax rate for each product category.

Separate from the Congressional moratorium, sizeable progress has been made in simplifying state tax laws. In November 2002, over 7,000 taxing jurisdictions in the U.S. were clustered to 45. Under the Streamlined Sales Tax Project, proposed by the National Governor’s Association, states can agree on their definitions of taxable goods as well as the tax rate for each product category. Proponents of the plan argue that Web businesses should be subject to the same rules of taxation as brick-and-mortar stores. Others argue against it, stating it represents a tax increase.

This shows some movement toward a unified Internet sales tax—it just hasn’t been happening on Capitol Hill, but in statehouses all across the U.S. Many view the tax not only as necessary, but inevitable because of fiscal desperation in states. With the upcoming election in 2004, it’s likely that federal steps will be taken to clear up the confusion—or that the moratorium will be permanently extended.

Clearly, the debate over Internet sales tax is not just limited to issues of business; it’s a hot political debate as well. With possible changes on the horizon, the best plan for a small business owner is to stay up to date on Internet news so you can be prepared to navigate the murky waters of tax legislation.

The Good News

There’s no evidence to suggest that customers will be deterred by an Internet sales tax.

Regardless of what Congress decides in 2004 or beyond, you’re unlikely to lose business over it. Although consumer groups oppose any additional charges, there’s no evidence to suggest that customers will be deterred by an Internet sales tax. The main reason they shop online is for convenience and for the high quality of your product, and they are willing to pay for it—with or without taxes.