Sales Internet Tax

History of Internet Sales Tax

"Internet transactions have virtually eliminated the geographic boundaries between states and localities that formerly provided the framework for sales and use taxation. As a result, a national tax policy must be developed through either uniform state laws or federal legislation. Any federal legislation or uniform state laws developed to regulate interstate electronic commerce must balance the needs and concerns of state and local taxing authorities with the needs of businesses and consumers. This balance must occur within the framework of basic tax principles of fairness and equality and minimization of administrative and compliance burdens." (Owen, 1998, p.245).

In order for Congress to approve any standard process, there will have to be a major simplification of individual state tax codes and a consensus among the states. "The U.S. Supreme Court has ruled twice (once in 1967 and again in 1992) that unless the vendor has a physical presence in the taxing state (such as employees, a warehouse or a retail location), the state cannot require the vendor to collect, on the basis that there are more than 6,000 taxing jurisdictions in this country and requiring remote vendors to comply with all these different laws is too burdensome," (Piersol, 2003, p.1). The Court has said Congress has the power to change this policy. Congress could pass legislation to require remote businesses to collect and remit sales tax.

In 1998, Congress passed The Internet Tax Freedom Act Moratorium. The Act imposed a three year moratorium on both taxes on Internet access and multiple or discriminatory taxes on electronic commerce, unless in either case the tax was imposed and enforced before October 1, 1998. The moratorium also prohibited state and local governments from imposing similar new taxes between October 1, 1998 and October 20, 2001. Congress extended this moratorium in 2001 and it is set to expire by November 2003.

The Internet Tax Freedom Act really did not address the issue of collecting sales tax on the Internet. Many states are losing

a lot of money because these taxes are not being collected. According to the National Governors Association, states and local governments are expected to lose $13 billion in revenue this year and $55 billion by 2011 as a result of uncollected sales taxes on e-commerce. To address this concern and to simplify the tax collection process, The National Governors Association created the Streamlined Sales Tax Agreement.

The goal of the agreement is to simplify taxes in order to address the growth of electronic business. A simplified system would also create fairness between remote sellers, which are not obligated to collect and remit sales taxes, and Main Street retailers, which must collect sales taxes. Retailers and states will voluntarily participate. In order to take part, states will be required to accept authorizing legislation and pass simplification measures which include uniform product codes and sourcing rules, developing uniform definitions of state tax laws, creating a central, one-stop registration system, and limiting the frequency local governments can change their tax rates. Under the new system, small and medium sized multi-state retailers would be able to use state certified software to calculate, collect and remit use taxes for transactions in states in which they do not have a physical presence.

According to (Collins), The Streamlined Tax Agreement includes the following provisions:

1. The provisions offer existing taxpayers a more modern tax collection system that provides more simplification and uniformity, coupled with a greater use of technology.

2. The provisions provide a simple voluntary solution for sellers not collecting today that wish to expand their business in areas where they are not currently required to collect tax.

3. For businesses concerned about the cost of compliance, a seller that volunteers can receive a tax collection function at no cost, by choosing the Certified Service Provider (CSP) model, or at a low cost, by selecting the Certified Automated System (CAS) model.

4. Simplified (state level) administration of local sales taxes: The agreement requires central administration of sales and use taxes for the state and the localities in each state. This provision is important to all taxpayers, in both state and multi-state, since they will only be required to file one return for each state.

5. Simplified exemption administration: The agreement removes the good faith requirement present in many states' laws concerning sales tax exemptions and provides relief for the seller if the purchaser issues an exemption certificate improperly.

6. Simplified rate structure: The agreement limits the number of rates present in a jurisdiction. Each state is permitted one general sale and use tax rate, plus a second rate limited to drugs and food.

7. Uniform definitions: The agreement contains a menu of definitions. Included among these are product definitions for food and food products, drugs and health care services, and clothing and accessories. The agreement also contains definitions for terms generally found in sales and use tax law, such as tangible personal property, retail sale, and purchase price. While some of the definitions are not simple, they are uniform throughout taxing jurisdictions. The uniformity in definitions will provide more clarity to businesses selling the defined products.

8. Uniform provisions for bad debts: The agreement provides uniform rules for states to follow for a seller to claim a deduction on its tax return for the amount of the bad debt deduction.

9. Uniform sourcing: The agreement contains sourcing rules specifying which taxing jurisdiction applies One uniform rule will reduce the number of rules that multi-state businesses must follow, simplifying the tax application.

10. Technology collection models: The agreement contains three certified tax collection and remittance models. The models make a greater use of technology in the tax application, tax collection functions, and allow taxpayers options based upon their individual business circumstances.

The agreement is effective as soon as 10 states pass legislation to comply with the agreement. To date thirty-eight states have adopted such legislation.

Chart 1

Streamlined Sales Tax Project - Participating States

Legal Issues with Regard to Internet Sales Tax

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