Taxing Times
By: David Cotriss
The issue of online taxation is revisited and not everyone thinks it's a good idea.
Back in the early days of the dotcom boom, rampant speculation arose about how or even if online sales should be taxed. For consumers, e-commerce was almost too good to be true: an ultimate extension of mail order, where any product could be ordered from an out-of-state seller with the click of a button, avoiding sales tax, albeit paying any shipping fees that were charged. However, since the mid-90s the e-commerce industry has evolved and U.S. economic conditions have changed, sparking legislators to make a serious push to implement some type of standardized tax code for purchases made online.
As a source of potential revenue for state governments, the topic of Internet taxation cannot be overlooked nor can the impact it may have on online marketers and affiliates searching for profits in an increasingly competitive medium.
According to a July 2004 research report from the Center for Business and Economic Research at the University of Tennessee, states are still losing billions of dollars in uncollected sales tax revenues from transactions that occur through electronic commerce. For 2004, the report estimates that states lost between $8.9 billion and $10.8 billion from e-commerce sales alone and predicts that this amount will continue to grow. By 2008, the report estimates that revenue losses from online sales will range anywhere from $11.8 billion to a high of $17.8 billion.
These figures may sound high, but they are actually below the previous estimates made in 2001. At that time, forecasters didn't factor in an economic slowdown and miscalculated on volume of business-tobusiness transactions, according to Neal Osten of the Federal Affairs Counsel, which was behind drafting the legislation known as the Streamlined Sales and Use Tax Agreement (SSUTA).
The Legislation
The SSUTA (outlined at www.streamlinedsalestax.org), became effective on October 1, 2005. It lays the groundwork for standardizing the way participating states define, charge and collect sales and use taxes.
The idea behind SSUTA is that by taking the burden of sorting through tax jurisdictions away from retailers, the participating states could in turn ask federal lawmakers to introduce new legislation, which could challenge the 1992 Supreme Court decision that forbids states from forcing a business to collect sales taxes unless the business has a physical presence within their state.
SSUTA required at least 20 percent of the population of states with sales tax to sign on in order to get rolling. At press time, 13 states had made all the changes in their sales and use tax statutes and administrative rules to comply. Those states are: Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota and West Virginia. Utah, Tennessee, Ohio, Arkansas and Wyoming are next in line to comply.
"It is the intent of the SSUTA to treat all transactions in a competitively neutral manner," explains the Federal Affairs Council's Osten. "That is, sales, whether they are made in a brick-andmortar retail operation or purchased online, are treated similarly for sales tax purposes. The agreement provides simplicity and some uniformity for out-of-state sellers in collecting a state's sales taxes." It's important to emphasize that currently the agreement is voluntary for both states and sellers. "The states, whether they comply with the agreement or not, do not have the authority to require remote sellers (such as affiliates) to collect their sales and use taxes," he says.
Osten explains that until Congress passes legislation giving those states that have complied with the agreement mandatory collection authority, remote sellers, online or not, have the option to volunteer to collect for sales made in the states that have complied with the agreement as of October 1, 2005.
If a remote seller volunteers to collect for one of the states in the streamlined system, they would have to collect for all the states in the system. Besides being compensated for collection costs, remote sellers that volunteer to collect are also given amnesty by these states if they may have had past collection responsibility in one or more of the states and did not collect sales taxes.
After Congress passes legislation and makes sales tax collection mandatory, amnesty will no longer be granted. Basically, nothing really changed for online sellers on October 1 unless they volunteered to collect for states where they did not have physical presence. Osten says that even if a company has a physical presence in one of the 18 complying states, it is not required to abide by the new agreement, which brings about an interesting point - compliance.
"The biggest problem that I foresee with collecting sales tax online is enforcement," says Alan Townsend, a LinkShare affiliate and marketing manager for PersonalizationMall.com. "Who's going to be responsible for determining who's in compliance and who isn't? There are so many opportunities here for loopholes it's mind-boggling. What state is the business registered in? What state is the domain name registered in? Who is it registered to?
What state is the site hosted in? What state do the products ship from? The only way for this to be fair and effective for the states and the businesses involved is to have all 50 states participate. But overall, I think the states are headed in the right direction to achieve their goal with the SSUTA; not that I'm for more taxes."
Taxation Inevitable
Some say the push for online taxes was coming. It was just a matter of when.
"I think the recent surge in interest by both old-world brickand- mortar firms as well as by legislators to collect more taxes from Internet sales is, in the greater context, an awakening to the explosive growth and potential of online firms and our industry in general," says John Lemp, CEO of online affiliate network Clickbooth.com. "Ten years ago, these types of laws were extremely unsuccessful. Even five years ago such laws would never have dreamed of passing, but now traditional firms are seeing the growth Internet companies are experiencing and how a law like this could slow migration of their customers to the Web.
"In the shift from offline to online spending the big losers are the states that collect less tax," says Ola Edvardsson, CEO of interactive strategy firm Performancy.com. "Since they are in the business of collecting taxes they are not going to sit by the sidelines and watch."
Dave Taylor, business blog strategist at Intuitive.com, adds that "arguably the situation is different today simply because the nation faces more debt with the war in Iraq, Hurricane Katrina and so on. Does that justify greater taxes? Perhaps."
The Burden
Still, some worry about the impact this move will have on continued growth and how smaller businesses will handle the burden of dealing with complex tax regulations.
"Whether this slowdown will be very minor or very large is still up for debate," Lemp says. Continued on Page 2...
Tags:
tax, laws, government, regulation, internet tax, enforcement, internet taxation, mail, report estimates, sales tax, legislators, albeit, tax revenues, dotcom boom, rampant speculation, click of a button, federal affairs, commerce industry, shipping fees, mid 90s, economic research, state governments, tax agreement, sales and use tax, tax code,
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