US Retailers Take The SSTP Bull By The Horns

by Mike Godfrey, for LawAndTax.com, New York

11 February 2003

Although the Streamlined Sales Tax Plan (a deal between up to 38 US states to simplify sales tax definitions and rates to allow efficient collection of sales taxes on-line) has yet to be passed into law by the majority of the participating states, it is now overwhelmingly likely that the SSTP will go into effect, and that the necessary Federal legislation to unblock cross-border sales tax collection will take place - and this has led a group of major 'bricks-and-clicks' retailers to begin voluntarily collecting sales taxes on their national sales.

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. But theory is one thing, and there is a perpetual worry that some court will eventually decide that the distance between bricks and clicks isn't wide enough to gain tax exemption.

So, anticipating a successful SSTP round (to be followed by legislation striking out the 1992 prohibition on taxation of inter-state sales) the retailers have decided to polish their public images and help the states, who are currently battling budget deficits, by beginning collection of taxes on-line. recent surveys have also suggested that consumers are not perhaps quite so aware of tax/no-tax as a choice point as had been supposed. Anyway, that's what the big retailers are choosing to believe. But does trust-busting legislation apply to a cartel that agrees to pay taxes voluntarily? Small retailers would wish it so, because they complain that the big guys have administrative systems that allow them to collect taxes more efficiently, and this amounts to unfair competition.

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.

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.

The retailers who have agreed to start tax collection are staying silent, afraid that states who have not joined in the deal will chase them for existing and past taxes if they advertise themselves. In the past week, however, Wal-Mart, Marshall Fields, Target, Toys R Us and Mervyn's each posted new sales tax notices on their Web sites, saying that the companies will charge taxes for buyers living in the states where sales taxes are on the books.

Wal-Mart Stores Inc. spokeswoman Cynthia Lin said that voluntarily collecting online sales taxes was the right thing to do. "Many states are struggling with tax revenue shortages that affect funding for everything from schools to fire and rescue. This is our effort to help customers and the states they live in," she said.

Recommended