These dissenters have now taken matters into their own hands. For the past six months, revenue officials from dozens of states have been hammering out plans to overhaul sales taxes for the Internet-era. They have two main objectives. One is to simplify the Byzantine system of sales taxes from state to state. The other is to give new tax- collection software a test drive.
The simplification effort goes to the core of the difficulty in taxing Internet sales. More than 7,600 state and local jurisdictions use a sales tax, and each one exempts its own list of products from the tax and defines items its own way. The system is so complex that the U.S. Supreme Court has held that it would be an "undue burden" for a retailer located in one state to collect sales taxes for all the states.
The Streamlined Sales Tax Project, as the states' effort is known, is developing new rules to make the administration of sales taxes more uniform from state to state. The most important area is definitions. Currently, state laws don't even agree, for instance, on whether corn chips are a "food," a "snack," or a "vegetable product." Model legislation, incorporating uniform rules and definitions, is being written for state legislatures to consider in 2001. "A widget ought to be a widget everywhere," says Charles Collins, North Carolina's sales- tax director and co-chair of the project. "We should all be talking about the same thing."
While those details get pounded out this fall, all eyes will be watching in October when Kansas, Michigan, North Carolina and Wisconsin are to test new tax-collection software. One or more vendors will act as intermediaries between the states and online retailers. When a customer buys something over the Internet, the vendor's software would calculate the tax due. His credit card would then be charged for the tax, the price of the item and any shipping charges. All the retailer would have to do is turn the tax over to the vendor, who would then forward it to the proper state.
The pilot software is being programmed to include the different rates, rules and exemptions in the four test states, and that is stirring up some controversy. Critics say that the states are groping for a silver bullet in the software, one that might let them punt on the difficult but necessary task of simplifying the tax code. "I call it simplification lite," says Mark Nebergall, spokesman for the Internet Tax Fairness Coalition, a group that includes new-economy heavyweights such as America Online and Microsoft Corp. "They want to automate a lot of the complexity."
Collins insists that the states are serious about simplification, that the pilot is only meant to gain experience in working with third parties on collecting taxes. Critics, he says, will get a chance to offer input on the direction the states are taking during a public comment period this month. Despite immense hurdles, "this is something that can be done," Collins says.
