RAPAPORT... Creating a uniform sales tax structure that is fair to both online and brick-and-mortar retailers is proving to be a challenge.
Sales tax codes have not kept pace with the evolution of online retailing. The internet dissolved geographic barriers and made it possible for businesses located anywhere in the world to do business with customers in any other part of the world. But tax codes were built on physical proximity; their origins essentially dated back to eras in which consumers shopped at retailers in their own communities. Sales tax codes are local and regional, charged by municipalities and states. They vary widely.
It is that complexity that can make compliance difficult. A 1992 U.S. Supreme Court ruling said that remote sellers are only required to collect sales tax from customers in states where they have a physical presence, such as a store, office or distribution center. With more than 7,600 state and local jurisdictions collecting sales tax — many with different rates, different lists of taxable items and different definitions — the court held that out-of-state merchants could not be expected to know what to collect.
Enter the internet, a retail channel that produced $136.2 billion worth of business last year, according to Internet Retailer. That figure represents significant sales tax losses for states and communities. And it also shows the advantage online retailers have over their brick-and-mortar competitors. When Blue Nile does not have to charge 6 or 8 percent sales tax on a diamond that costs thousands, it’s a competitive edge.
“For 15 years, internet and other remote retailers have had an unfair tax advantage,” says Matthew Runci, president and chief executive officer (CEO) of Jewelers of America (JA), one of many entities working to correct the situation.
The problem has not necessarily been one of avoidance, according to Maureen Riehl, vice president and government and industry relations counsel for the National Retail Federation (NRF), but more one of compliance. Large, multistate chains with centralized state tax functions had difficulty keeping track of the sales taxes charged by state and local jurisdictions. Rules could change abruptly and these companies could find themselves being fined and audited for noncompliance. They might find themselves in a situation in which they had charged too much sales tax and be required to return it to consumers — while the state kept that tax and fined the company for being out of compliance. Clearly, in an era in which geographic boundaries had dissolved, geographically based tax codes no longer worked.
SOLUTIONSBoth the retail community and state and federal government have long recognized this problem and are working on a solution. It’s called “sales tax simplification,” an effort to create uniformity across state lines, with common definitions and common processes. Retailers — both online and brick and mortar — and legislators have been working on this task since 1999, according to Riehl. It’s been a mammoth undertaking, requiring states to agree upon common definitions for food, clothing, jewelry, medical devices and other items commonly subjected to a sales tax. Now, the focus is on the next generation of items — digital books and music that consumers download off the internet.
There are currently 21 states that are part of an entity called the Streamlined Sales Tax Governing Board. These are states that have implemented the Streamlined Sales and Use Tax Agreement (SSUTA).
SSUTA simplifies many aspects of sales tax law and creates a mechanism for collection and distribution. The agreement went into effect on a voluntary basis in 2005. In essence, these states have removed the complexity from their sales tax codes, making them simple enough for out-of-state retailers to comply with. Right now companies can opt in as voluntary participants — and get amnesty from being fined for being out of compliance as long as it’s clear that they made an effort to comply.
Fifteen states are full members, meaning that they are in full compliance with the SSUTA. Six are associate members, which means that they are in compliance, but that all the regulation and laws that bring them into compliance will not go into effect on or before January 1, 2008. Or, it could mean that they are not totally in compliance but seem capable of being in full compliance by January 1, 2008.
COMPLIANCEThe next step is to mandate this sales tax collection by law. To that end, the “Sales Tax Fairness and Simplification Act” was introduced in May by longtime sales tax simplification advocate Senator Michael Enzi, R-Wyoming. The bill would allow states that have implemented the SSUTA to require that out-of-state “remote seller” merchants collect sales tax on merchandise sold to residents of their states. Retailers would be compensated for the cost of sales tax collection, and collection could be outsourced to certified service providers. Retailers with less than $5 million in annual gross remote sales would be exempted.
There’s also a software program being designed to help retailers calculate what they owe the various entities charging sales tax, according to Peggy Jo Donahue, director of public affairs for JA, who adds that the JA is committed to keeping the pressure on government until the Sales Tax Fairness and Simplification Act is passed.
Riehl says that there is “bipartisan recognition that the sales tax system is built on the old economy.” This latest introduction of the sales tax bill — an earlier version was introduced in 2005 — is part of an ongoing effort to change, evening the playing field for both online and brick-and-mortar retailers.
Article from the Rapaport Magazine - July 2007. To subscribe click here.