Internet Sales Taxes May Have To Exempt Small Businesses

by Mike Godfrey, for LawAndTax-News.com, New York

24 February 2003

It is now overwhelmingly likely that the US States' plan to simplify sales taxes and permit collection of sales tax on the Internet (the SSTP, or Streamlined Sales Tax Project) will go into effect, and that the necessary Federal legislation to unblock cross-border sales tax collection will take place.

Accordingly, a group of major 'bricks-and-clicks' retailers has begun voluntarily collecting sales taxes on their national sales; but many small retailers worry about compliance with what still seems to them will be a complicated and costly system, meaning that they would have to keep records separately for every state in the Union.

Utah Governor Mike Leavitt, who led work on the SSTP says that participating states deliberately left out a small business exemption in order to achieve consensus on the plan. "The idea was to create enough certainty that people could get the picture without trying to go into such elaborate detail that it precluded our ability to respond to these concerns going forward," he said. However, he does support such an exemption, and thinks that Congress will only approve online sales tax initiative if such an exemption is included.

Senator Byron Dorgan (Dem - North Dakota) is planning to sponsor a bill this year that would approve the SSTP legislation which more than 30 states have already introduced - and will include a small business exemption. "We're conscious about the need to address the issue with respect to the small retailers who are not going to have the capacity to make the collection effort," Dorgan said.

For the states, a resolution of the internet sales tax problem is vital: a report by the University of Tennessee last year estimated that all 50 states could collectively lose more than $45 billion in Internet sales tax revenue in 2006.

A recent report from New York City consulting firm Jupiter Research says that imposition of a sales tax on e-commerce transactions is indeed likely within three to five years, but "this will not be a significant impediment to the growth of the online retail channel." The new report, entitled "Sales Tax: Avoidance Is Imperative to Few Online Retailers and Ultimately Futile for All" and based on a November 2002 consumer survey, says that most online shoppers are either unaware of the fact that sales tax can be avoided by searching across multiple online retailers or do not see it as cause to choose one retailer over another.

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