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
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
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
Bluelight.com, 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
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