Finance

Ready for Prime Time: Internet Sales Taxes are a Giant Step Closer

Internet sales taxes go live on October 1. That's when online retailers will be asked to start collecting the tax--at least for the 18 states that have recently passed laws simplifying and harmonizing their sales tax systems. The big question for this meticulously designed scheme, which is strictly voluntary for the retailers, is how many of them will actually sign up.
by | August 2005

Internet sales taxes go live on October 1. That's when online retailers will be asked to start collecting the tax--at least for the 18 states that have recently passed laws simplifying and harmonizing their sales tax systems. The big question for this meticulously designed scheme, which is strictly voluntary for the retailers, is how many of them will actually sign up.

The answer may take a year or more to pan out. But it's important for two reasons. First, if a lot of retailers agree to collect the states' taxes for them, then other states will surely want a piece of the action. More legislatures might be inspired to take on the difficult task of restructuring their sales taxes in order to join the regime. "Once we show that the system can work, it'll be a big selling point," says Utah Tax Commissioner Bruce Johnson.

Secondly, a successful showing could get the U.S. Congress's attention. Only Congress can sanction the states' tax simplification efforts and make collecting sales taxes mandatory, rather than voluntary, for all retailers. "Having a system that's operational and is no longer just theoretical," Johnson says, "will make it easier for Congress to take us seriously and hopefully approve what we're doing."

To encourage retailers to participate, the 18 "member" states are offering a tax amnesty program. Some dot-com retailers created corporate structures designed to escape the collection of sales taxes (see sidebar). Tax officials hope that retailers will sign on to the new system in exchange for wiping the slate clean. In addition, retailers who agree to use state-certified tax software won't be held responsible for any mistakes in calculating tax owed.

Many retailers remain skeptical. For example, Amazon.com, which collects sales taxes only in the three states where it owns facilities, says the states still need to figure out how to compensate retailers for tax-collection expenses they will incur, such as credit card fees. "Even with the progress made towards simplification," says Rich Prem, Amazon's director of global indirect taxes, "trying to collect taxes for 7,600 jurisdictions in the current system would be unduly onerous."

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