Contrary to popular belief, the internet is not a tax-free zone
in the US. Online transactions are meant to be taxed. The problem
is that most customers don't know they're supposed to pay them and
states lack an effective enforcement mechanism to collect them
because tax rates and rules vary from state to state.
Internet businesses currently rely on a 1992 Supreme Court
decision that prevents states from collecting sales taxes from a
business unless the company has a physical presence or “nexus” in
that state. Because most online merchants maintain physical stores
in few places, they exempt customers from most states from paying
taxes.
This creates an obvious discrepancy between online and off-line
retailers, with the latter arguing that it is unfair for them to
have to collect taxes while their online competitors do not, making
it harder to compete with a dot.com.
It also means that states are missing out on the tax revenues
that could be generated from booming internet sales. Many have
lobbied Congress to legislate against the tax exemption offered by
the Supreme Court ruling.
For the past five years around 40 states have been working
together on the Streamlined Sales Tax Project, which aims to
simplify the nation’s sales tax laws by establishing one uniform
system to administer and collect sales taxes, including those for
online sales.
According to the E-Commerce Times, 11 states, including
Iowa, Michegan, Nebraska and West Virginia, are now ready to launch
their online sales tax collection program. Seven more are waiting
for their tax codes to be amended to be fully compliant with the
Project.
Once up and running this voluntary scheme will allow online
merchants to collect taxes according to the rates in place where
the customer lives.
The scheme offers free tax collection and remittance software
and also offers an amnesty of one year to online businesses that
have not been making appropriate collections in the past. This may
be attractive to online merchants, some of whom have already found
themselves in court over online taxes.
In May, the internet arm of bookseller Borders was found liable
for sales taxes on products that were ordered by customers resident
in California. An appeals court dismissed the company's argument
that its internet division had no physical presence in the state
after examining the connection between the internet division and
the off-line stores.
