States Attack US Retailers Over Past Sales Tax Amnesty

by Glen Shapiro, LawAndTax-News.com, New York

27 February 2003

The large US retail groups which were accused of mounting a publicity stunt when they recently started collecting sales tax on their e-commerce business, are now facing new problems as some states object to the amnesty provision in the SSTP (Streamlined Sales Tax Program) legislation which is aimed at creating a harmonized sales tax regime across the nation.

More than 30 states have so far passed the legislation, which was developed by the SSTP to simplify sales tax definitions and rates to allow efficient collection of sales taxes on-line, and it is now overwhelmingly likely that it will go into effect, and that the necessary Federal legislation to unblock cross-border sales tax collection will take place.

With or without the SSTP, the problem for a major retailer with outlets in all or most states, and which collects sales taxes at all of its outlets (because sales are intra-state), is that its on-line associate or subsidiary only has physical location ('nexus') in a small number of states, and can therefore theoretically dodge collection of tax on sales to states where it doesn't have nexus. Pending the Federal legislation, it is not lawful to collect sales tax on transactions that take place across a state line.

Those retailers who are choosing to collect sales tax on cross-border on-line sales are tacitly admitting to nexus even in the states where they don't have servers, and opening themselves to liability on past sales - hence the need for the amnesty. Illinois last week announced that it has joined a lawsuit seeking payment of past online sales tax obligations brought by Chicago law firm Beeler, Schad & Diamond against Wal-Mart, Target, Office Depot and several smaller retailers. New York is considering similar litigation. "I'm trying to put together a nationwide coalition to go after these companies," said one of the firm's attorneys. "The very companies that are the greatest malefactors are the ones trying to win amnesty."

Wal-Mart and Target were two of the firms that started collecting on-line sales taxes two weeks ago, although they were careful not to announce the move publicly, fearful of exactly the type of action that has now been brought. Illinois was among five states that tentatively approved the amnesty deal but put off formally signing it while a new governor took office. The other states are Nevada, New Mexico New York and Pennsylvania. Meanwhile, three other states - Arizona, California, and South Carolina - rejected the amnesty offer outright.

The states are gripped by an unparalleled budget crisis, and even if they accept the overall logic of the SSTP they are likely to try to screw the maximum possible amount of money out of rich national retail groups before giving in. Arizona and South Carolina are forecasting deficits in excess of $1 billion, while Nevada is projecting at least $740 million. "There is potentially a lot of money owed to the state," said Illinois Attorney General Lisa Madigan. "Illinois is facing between two to five billion in deficits this year, and we need to make sure we are collecting revenues owed to the state."

Other states are watching the Illinois legislation carefully. But if the states are too aggressive against retailers, their actions are likely to be self-defeating, with one probable outcome that the SSTP, which has take five years of patient diplomacy to reach near-fruition, will unravel as retailers back off and the consensus in favour of Federal legislation falls apart.

Recommended