New Sales Tax Tool For States Proposed

Members of Congress have introduced a bill designed to help states with budget shortfalls by taxing Internet and mail-order purchases.

The bill authorizes an association of states to enforce sales tax laws on retailers that ship goods into those states. Its sponsors estimate that state and local governments forgo nearly $26 billion in revenue each year by failing to tax these transactions.

To tax remote transactions, state legislatures must join a national association of states. The association will be responsible for simplifying the existing morass of state and local sales tax laws, making it easier for retailers to comply with them.

Each of the 45 states that collects sales tax has its own system for classifying retail goods into taxable and non-taxable categories. In 1992 the U.S. Supreme Court ruled that keeping track of these rules placed an undue burden on retailers and would hamper interstate commerce. Based on that premise, the Court exempted remote retailers, such as Internet and catalogue businesses, from charging sales tax to out-of-state customers.

The proposed association would reduce the burden on retailers by adopting a unified system of state definitions. Once Internet and catalogue operations can feasibly keep track of state sales tax laws, they will be required to collect taxes.

Mayland state Sen. Patrick Hogan (D) provided a concrete example of how the new system would work: “A Twix bar would be a candy bar whether it’s in Maryland, California or Maine. Not a bakery good in one state and a candy bar in another. [This lets] retailers know, under the common definitions, this is classified as this’.”

Although participating states will have to agree on products’ definitions, they will not have to tax all the same products. In other words, while Maryland and California must agree on Twix’s status as a candy bar, they do not have to agree to charge the same tax on candy bars.

Arriving at a single set of product definitions represents one of the bill’s primary challenges to the states.

“Ultimately, if we want to participate in the collection of these sales taxes, we may well have to compromise or change some of our definitions in order to agree with other states,” said Pennsylvania state Rep. David Steil (R).

Though the bill promises increased revenue, not all state leaders have embraced it.

Colorado Gov. Bill Owens (R), is among those opposed. “When I buy something from the Internet or a catalog, that store or factory or mail center isn’t receiving any benefit from the state of Colorado or my city of Centennial, Colorado, so why on Earth should it have to collect a tax for something it receives no benefit for?” he said in a speech delivered in Washington, D.C. this summer.

Thirty-four states have agreed to join the association to date. Twenty of those have already passed legislation making their membership official.

Harley Duncan, executive director of the Federation of Tax Administrators, expects most of the 45 states that collect sales tax to come on board if the bill passes.

Representatives William D. Delahunt (D Mass.) and Ernest Istook, Jr. (R Okla.) are sponsoring the bill in Congress with Senators Michael Enzi (R Wyo.) and Byron L. Dorgan (D N.D.).