States Taking Lead in Online Sales Tax Collection

Since the dawn of the e-commerce era, consumers have enjoyed virtually tax-free shopping online. If you live in Arizona and purchase an item from Ohio, you usually pay no tax. However, the lack of any form of sales tax for Internet shoppers has led to states to cry foul, as tens of billions in tax revenue dollars has disappeared. Now, states are taking matters into their own hands as progress on a federally mandated Internet tax bill appears to be stalled.

In October, we reported on the Streamlined Sales Tax Project (SSTP), consisting of 18 founding states, is expected to organize into a legal entity called the Streamlined Sales Tax Governing Board. The 18 states admitted to the group represent 25.3 percent of the U.S. population.

The new group has certified software and service providers for retailers to use to charge and collect sales taxes, although retailers in the 18 states are under no obligation to collect the taxes.

For that to happen, Congress has to pass legislation certifying that the states have actually simplified their sales tax structures in order to satisfy a 1992 Supreme Court ruling.

The 1992 decision said that, while buyers legally owe sales taxes on Internet and catalogue sales, the current patchwork of more than 7,500 taxing jurisdictions across the country is too complex and burdensome for online retailers to charge and collect the tax.

To collect the taxes, the court ruled, states have to simplify their sales tax structures. To that end, states began the process of simplifying their sales tax structure five years ago through SSTP.

Under the rules of the multi-state compact, the simplified sales tax system cannot take effect until at least 10 states representing 20 percent of the total population are in compliance with the agreement.

Lawmakers in Washington, however, have shown no sign of passing an Internet sales tax before the end of 2005.

Nevertheless, Joe Huddleston, executive director of the Multistate Tax Commission, said in October that the formalization of the Streamlined Sales and Use Tax Agreement is a "substantial first step. It begins the operational function of the SSTP."

The 18 states preparing to join the group are Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Tennessee, South Dakota, Utah, West Virginia and Wyoming.

Connecticut Joins the Fray
On November 15, 2005, several thousand Connecticut residents reportedly received a surprise in their mailboxes. The state's Department of Revenue Services began sending out letters to those suspected of purchasing goods over the Internet without paying the proper state use tax.

In part, the letter says, "Dear Taxpayer, A review of our records indicates that you have not reported any purchases subject to Connecticut use tax. This may have been an oversight, or you may not have been aware of the...use tax. Connecticut General Statutes, Section 12-411, imposes a use tax on any person who purchases taxable items for use in Connecticut where the seller has not charged the appropriate sales tax...Connecticut residents are required to report this tax liability when they file their annual Connecticut income tax returns."

According to one CPA in Connecticut, who asked not to be identified, this letter may cause recipients some worry, but said the move is more likely an attempt by the state to see how much it can collect voluntarily. This person also told ECommerce-Guide.com that the state revenue department lacks the adequate staffing in which to enforce these requests so most recipients could probably ignore the letter for now. Or, this person added, "Figure out what you owe and pay up. At the very least, pay them a few bucks and hope the State is happy with what they get."

Connecticut has an agreement with New York State's Department of Revenue, which allows both states to share merchant information as part of the states' Reciprocal Tax Program.

Devin Comiskey is the Managing Editor of ECommerce-Guide.com. Roy Mark contributed to this report.