Speaking of Sales Tax...What About Sales Tax on Internet Sales?

As I wrote about state sales tax yesterday, it occurred to me that I needed to check on the status of efforts by states to collect sales taxes on Internet sales.

Currently, if you have a "bricks and mortar" business with a physical presence, and you are selling goods and services to customers, you must collect and pay sales taxes if your state charges sales tax. (Currently 5 states do not collect sales tax - Alaska, Delaware, Montana, New Hampshire, and Oregon.) But what about sales tax on Internet sales? If you are selling to someone in another state, you are not required to charge sales tax unless your business has a "physical presence" in that state. You could argue that the Internet companies have an unfair advantage over small businesses that don't sell online.

The states are thinking of all the revenue they're missing! They have been trying for years to crack down on Internet sales. One attempt, H.R. 3396, the “Sales Tax Fairness and Simplification Act,” appears to be stalled in Congress.

The other initiative, started in 2003, is the Streamlined Sales Tax Project, which now has 22 states joined together to see if they can get some leverage and force companies to pay sales taxes on Internet sales. Their stated goal is a "simpler and more unified" tax system, and their tactic seems to be making it "easier" to pay the taxes. You can voluntarily pay your sales taxes to this body; they even offer an amnesty provision, forgiving past owed sales taxes.

A New York law requiring online merchants to charge sales tax has been challenged by online giant Amazon... the jury is still out on that one. But other states are jumping into the fray. Tennessee, for example, is attempting to redefine its definitions to fit with the "streamlining initiative." The more states that comply with the Initiative, the easier it will be for them to persuade Congress to pass a law requiring sales tax on Internet transactions.

Note that the Quill decision, in 1992, said that retailers are only required to collect sales tax on out-of-state transactions if they have a "physical presence" in that state. It's difficult to agree that Amazon has a physical presence in Iowa, for example, unless they have a distribution center that I don't know about.

In any case, as the number of states signing up for the Streamlined Sales Tax Initiative is increasing, it appears that the days of tax-free online sales are numbered. For the present, if you are an online merchant, sit tight.