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More States Looking to Tax Online Sales

Attention, online shoppers. The days of tax-free online shopping may be coming to an end.

Proposed legislation would force online retailers to start collecting sales taxes in a growing number of states.

More than a dozen states have enacted legislation or rules to force online retailers to collect sales taxeson purchases, according to tax publisher CCH.

Similar legislation is pending in 10 states.

Reasons for the spread of online sales tax laws:

• Budget shortfalls. The National Conference of State Legislatures estimates that uncollected state sales taxes will cost states $23 billion this year. Residents of sales-tax states are supposed to pay taxes on online purchases, but because retailers don't collect them, they rarely do.

• Heavy lobbying from retailers. Retailers have long argued that exempting online purchases from sales taxes gives online retailers an unfair advantage over brick-and-mortar stores. The pressure escalated in December after online giant Amazon offered customers a one-day 5% discount if they used its Price Check app to make a purchase while in a physical store, says Jason Brewer of the Retail Industry Leaders Association, which supports taxing online purchases.

"A store manager has the power to say, 'I'll match that price,' but they don't have the power to say, 'I won't charge you a sales tax,' " he says. "They go to jail if they do that."

• Gridlock. Legislation has been introduced in the House and Senate that would give states broad authority to require online retailers to collect state sales taxes, as long as they streamline the collection process.

Amazon supports the legislation, says spokesman Ty Rogers. Federal legislation to permit interstate collection of sales tax "is the only way to level the playing field for all sellers and provide states the right to obtain more than a fraction of the revenue already owed," he says.

Despite bipartisan support, though, the bill has languished in Congress. "Many of the states have gotten somewhat frustrated waiting for Congress to act," Brewer says.

In 1992, the Supreme Court ruled that states couldn't require retailers to collect sales taxes unless the retailers had a physical presence in the state.

Increasingly, though, states have interpreted that requirement to include subsidiaries or affiliates of online retailers, or online retailers with a warehouse or distribution center in the state.

Critics say the measures would force online retailers to collect sales taxes in dozens of states and jurisdictions, with different rates and definitions of which products are taxable.

"A brick-and-mortar retailer only has to keep track of one sales tax rate," says Joseph Henchman, vice president for the Tax Foundation, a non-profit tax research group. "An online retailer would have to collect tax based on where their customer is located."

The administrative burden would be particularly difficult for small businesses that sell their products online, says Jerry Cerasale, senior vice president for the Direct Marketing Association.

These merchants could be forced to raise prices to cover the added compliance costs, Cerasale says.

"That's going to harm e-commerce, which is one of the few promising growth spots in this somewhat stagnant economy."

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