States Agree Internet Sales Tax Framework

by Mike Godfrey, Tax-News.com, Washington

05 July 2005

Tax officials, state lawmakers and industry representatives have agreed to establish an 18-state network for collecting taxes on internet sales in a deal that they hope will encourage online retailers and Congress to adopt a national online sales tax framework, according to the Washington Post.

"The vote is a culmination of over five years of hard work by states, local governments and businesses interested in seeing the complexity in sales tax [reduced]," noted Stephen Kranz, tax counsel for industry trade association the Council on State Taxation, the Post reported.

As a result of last Thursday's agreement, software vendors contracted by the Streamlined Sales Tax Project will on October 1 begin providing free tax collection and remittance software and services to online merchants who voluntarily agree to collect taxes on all online sales on behalf of the 18 participating states.

Internet retailers that agree to collect and remit taxes will do so for online sales originating in any of 11 states that have amended their state laws to fully comply with standards developed by the sales tax project. In the other seven states, the internet sales tax collection would be optional until their tax codes are brought into full compliance. In both these cases, any taxes the retailer collected would be based on the rates in effect where the buyer lives, and the retailers would be compensated for the cost of collecting and remitting that revenue to the states.

The states will also offer a one-year amnesty for e-commerce companies that may owe taxes on past online sales to any of the participating states in a bid to encourage more firms to participate in the project.

The agreement comes soon after a three-judge panel at the California 1st District Court of Appeal in San Francisco in May ordered Borders.com, the online division of the bookseller Borders Group, to pay $167,000 in back taxes to the state because the company allowed customers who bought books online to return them at the company's brick-and-mortar stores.

Borders had argued that it doesn't have to collect California sales taxes because its online division, which has since been outsourced to Amazon.com, does not own or lease property in the state, and all internet orders were received and processed outside the state. However, the judges felt that the firm's web site and retail stores are inextricably linked and could not be defined as separate entities.

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