States Consider Web Purchase Tax

Wednesday, January 31st 2001, 12:00 am
By: News On 6

Worried about billions in lost revenue, some governors and lawmakers want to standardize tax codes from state to state to try to capture sales taxes on things bought over the Internet.

Technically, online purchases are subject to state sales taxes, but it is usually up to the buyers to pay, generally by reporting such transactions on their tax returns. And few people do so.

As a result, states are projected to lose up to $20 billion a year in unpaid e-commerce sales taxes by 2003, according to a study cited by the National Governors Association.

The governors association, with state lawmakers and others, is pushing legislation to make it easier for states to capture such taxes. So far, the legislation has been introduced in Nebraska and Wyoming, and governors or lawmakers are planning to do the same in nine other states.

``The mantra of the 21st century has to be local control but central coordination,'' said Utah Gov. Mike Leavitt, a strong advocate.

Under the legislation, states would adopt uniform sales tax definitions and categories. As part of the effort, new software would enable e-retailers to calculate and collect the tax depending on the state where the buyer lives. The seller would then send the taxes to the various states.

The proposal aims to provide a bit of order to the dizzying array of tax regulations across the country. In some states, potato chips are taxed as a snack; in others, they are untaxed as a grocery. In California, the tax on potato chips depends on the size of the bag.

Even if states buy into this approach, they will be relying on e-sellers to voluntarily collect and send taxes to the states — at least until Congress acts or a Supreme Court ruling is overturned.

In a 1992 ruling on mail-order sales, the high court declared that a state cannot force a business to collect sales taxes unless that company has a physical presence in that state, such as a store or warehouse. The court cited the burden of differing regulations from state to state — a problem the uniform legislation is meant to address.

The idea faces opposition from politicians unwilling to hamper the growing Internet economy, and from e-retailers who do not want the burden of collecting taxes.

``This could be a wet blanket on the Internet economy as sites are trying to make money,'' said David Karraker, a spokesman for, which sells Kmart goods and is 60 percent owned by Kmart. The company collects sales taxes only in Ohio and in California, where it has warehouses and other operations.

The U.S. Chamber of Commerce is studying the idea.

``If you're adding a burden to business, especially small businesses that are just getting onto the Internet, that's a problem,'' said Rick Lane, who oversees e-commerce for the chamber. Still, he said, ``We are interested in any effort that would help streamline and make the collection of sales and use taxes more efficient and would provide a more level playing field for the online and offline retail players.''

The question of sales taxes on the Internet has been around for several years, with states seeing tax revenue fall as Internet commerce grows. In Utah, about 1 million people filed tax returns, Leavitt said, but only 3,400 reported and paid taxes on Internet or mail-order sales.

On another tax front, governors in Kentucky and Minnesota want to extend sales taxes to services.

And despite signs of a weakening economy, governors in more than a dozen states called for tax cuts in their State of the State addresses in January, extending a six-year trend that saw states cut some $33 billion in revenue.

Clearly, this year's tax debate won't be only in Washington.

``It's an opportunity,'' said Minnesota Gov. Jesse Ventura. ``We're in a new economy. The times have changed greatly. Yet our tax system, how we tax, has not.''

In his state, he said, a man now pays taxes on getting his dog groomed, but not on his own haircut. He said he wants to broaden taxes to all services — along with cutting the sales tax and lowering income and property taxes.

Kentucky Gov. Paul Patton also wants to extend the sales tax to some services.


On the Net:

National Governors Association:

National Association of State Legislatures: