This holiday season may be a little less cheery for some online shoppers. The sales tax break that had delighted many an Internet gift purchaser is going the way of free digital music downloads and the one-horse open sleigh.
More and more companies voluntarily are collecting state and local sales taxes on online purchases—and an even greater number could be collecting by this time next year—under a tax-collection agreement with 19 states so far.
"Most people already think they're paying sales tax on online purchases. They just assume it's included. So I don't think it's going to be a shock for people. Those people who like shopping online—for the convenience, etc.—will continue," said Neal Osten, federal affairs counsel for the National Conference of State Legislatures (NCSL).
While retailers such as Wal-Mart—with both stores and online catalogs—have been collecting sales taxes for Internet purchases for years, most online retailers without a storefront have been exempt from collecting sales taxes from out-of-state customers under a 1992 U.S. Supreme Court decision.
The court ruled that forcing businesses to navigate the myriad and diverse state and local tax codes- more then 7,500 nationwide—would constitute an unfair burden. It held that companies can't be required to collect sales and use taxes unless they have a physical presence—or a "nexus," in legalese—in a state.
That ruling has cost states more and more missed tax revenue as more and more shoppers have turned to the Internet - as well buying through catalogs and TV shopping channels. All but five states -- Alaska, Delaware, Montana, New Hampshire and Oregon - rely on sales taxes to fund essentials such as public education, health care for the poor and roads.
NCSL estimates that states in 2004 missed out on $8.9 billion in revenue from online sales. Forrester Research expects online purchases to more than double between 2004 and 2010 to $316 billion.
So NCSL, a bipartisan organization of state legislators, has helped spearhead an effort since 1999 to coordinate and simplify states' sales tax structures, in large part to make it easier for states to collect sales tax on online purchases.
While seeking a permanent fix in Congress, states meanwhile are settling for a voluntary system. At last count, 217 companies have agreed to use newly developed software to collect sales tax on online and other remote purchases, Osten said.
Consumers, though, may not know which Web retailers are now charging sales tax until they go to the check-out screen. That's because the names of participating businesses are confidential, according to Scott Peterson, interim executive director of the Streamlined Sales Tax Governing Board, an organization of state officials set up to help administer the agreement. Wal-Mart Stores Inc., the world's largest retailer, has publicly acknowledged plans to participate.
The taxes will be collected on behalf of the 19 states that so far have standardized their sales tax structures. Experts predict more states will follow suit in the coming year. So far, Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Utah, West Virginia and Wyoming have signed on to the agreement, which took effect Oct. 1.
The agreement—called the streamlined sales tax agreement—offers incentives for companies to get on board early. Businesses that voluntarily sign up in the first year will be compensated for the costs of collecting the sales taxes, are granted amnesty from penalties for failure to collect taxes in the past and will not be held liable for mistakes in calculating or collecting the taxes.
In addition to common definitions for taxable items, the agreement stipulates that items are taxed based on the destination where they are shipped, rather than on the location of the company, meaning out-of-state buyers will pay sales tax to their own states. For instance, if a customer in Iowa purchases an item from a participating company located in Kansas, the company will collect sales tax on behalf of Iowa.
Groups such as NCSL and the National Governors Association have been lobbying Congress for several years to grant states full authority to collect taxes from online retailers -- so far to no avail.
Wyoming Sen. Michael Enzi (R) plans to propose a bill, perhaps as soon as this week, that would allow states that sign on to the sales tax agreement to require companies to collect sales tax on online purchases. Without congressional authorization, states are unable to require businesses to collect sales tax on remote purchases, unless the company has a physical presence in the state.
"The real solution is to get Congress to act," said Harley Duncan, executive director of the Federation of Tax Administrators.
Craig Shearman, spokesman for the National Retail Federation, said the agreement helps ensure that brick-and-mortar businesses are on equal footing with online companies.
"We support a level playing field where all retailers operate under the same tax rules, regardless of whether they sell their merchandise in a store, by mail or on the Internet." Shearman said.