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Online Sales Tax Is For Real

In February, an anonymous band of large retailers struck an unusual deal with 37 states. The sellers, which reportedly include Wal-Mart, Target and Toys 'R' Us, agreed to begin collecting sales taxes from their customers who make Internet purchases.

In February, an anonymous band of large retailers struck an unusual deal with 37 states. The sellers, which reportedly include Wal-Mart, Target and Toys 'R' Us, agreed to begin collecting sales taxes from their customers who make Internet purchases. In exchange, the states promised not to sue them for back taxes. They also agreed to ignore the retailers' past ploys in which many large brick-and-mortar stores set up Internet shops as separate divisions. For behemoths such as Wal-Mart, with stores in all 50 states, the old structure paid big rewards: Walmart.com, for instance, could largely avoid the hassle of collecting sales taxes, except in the nine states where the dot-com side of the business owned an office or warehouse. Now that will be impossible.

Why the deal? For their part, big retailers have a new business model in mind. They want their Internet units to be closely integrated with the brick-and-mortar side, and the need to maintain separate subsidiaries for tax purposes is getting in the way. Walmart.com was already testing the limits of separation when it began allowing customers to return purchases made online at a Wal-Mart store. Now it may blur the lines further by letting customers buy products online and pick them up at a store. "There will no longer be a need to keep those businesses separate," says John Coalson, the Atlanta attorney who represents the group of retailers and who initiated discussions with the states.

The states that signed on to the deal did so to help stem their tide of red budget ink--now and in the future. Not that the agreement, which will pump perhaps $25 million into state coffers this year, comes close to solving their budget woes. But with states facing a combined $30 billion in shortfalls this year and an estimated $80 billion next year, they figure every little bit helps. More important, the deal mitigates future losses as the retailing giants' online sales grow in the coming years.

Not all the states are going along with the deal. Three states-- Arizona, California and South Carolina--have rejected the offer, while several other states are weighing their options. Illinois is suing Wal-Mart and Target, among other retailers, for non-payment of taxes. South Carolina isn't planning any lawsuits, according to state revenue director Burnie Maybank, but auditors there are pursuing an "aggressive nexus program" seeking back taxes from retailers. "We don't enter into agreements to wipe out back taxes on an anonymous basis," Maybank says.

Still, the deal gives momentum to proponents of taxing all Internet sales. Some 34 states are moving toward that goal after signing an agreement in November to streamline and simplify their sales tax structures. As state lawmakers debate the pact this spring, opponents are finding their arguments undercut by the big retailers' willingness to deal with the sales tax: Perhaps collecting it online wasn't so complicated after all.

Another argument--that forcing retailers to collect taxes will hurt their sales--isn't bearing out, according to Wal-Mart. "We haven't seen an impact on our online sales," says Cynthia Lin, a spokesman for Wal-Mart, which began collecting taxes for all states on February 1. "Our sales continue to be strong and continue to grow."

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