DNSO Archives: [registrars]

February 17, 2003

The Battle Over Online Sales Tax Turns Acrimonious

By BOB TEDESCHI

he online tax debate has suddenly become loud and bitter, with Wal-Mart Stores and Amazon.com as the leading antagonists. But the recent activity over Internet sales taxes may have only minimal impact on consumers and tax collectors, many retail executives and industry analysts say.

That is because many of the biggest traditional merchants, including Sears, Roebuck; Gap; and Circuit City Stores, have long been collecting sales taxes from their online customers. And the biggest online tax resistors — Amazon, eBay and Dell Computer — seem unlikely to start collecting sales taxes any time soon.

The Internet tax debate has drawn considerable publicity in light of recent moves by a group of states to propose a simplified uniform tax code to stimulate collection of online sales taxes, as well as decisions by Wal-Mart, Target, Toys "R" Us and other big retailing chains to begin collecting such taxes. But online retailing analysts say the flurry of activity means more politically than economically, because Wal-Mart and the other new converts are not yet big e-tailers, while the states still have a long road ahead of them in efforts to bring companies like Amazon to heel.

Analysts say the online sales taxes from the recent new retail converts are likely to yield little more than $30 million in new online sales tax revenue this year — which would not amount to much as it is split up among the nation's 7,500 or so state and local tax jurisdictions.

And "from the consumer's standpoint, this is just not a big deal," said Kate Delhagen, a retail analyst for Forrester Research, a technology consultanting firm, who said that customers who had already been paying sales taxes for online purchases seemed to care little about the incremental cost.

Ken Cassar, an analyst with Jupiter Research, agreed, noting that in a recent Jupiter survey, 82 percent of consumers said taxes had no effect on their online shopping.

In any case, the largest portion of the $51 billion total online sales that Jupiter is forecasting is expected to go to big Internet-only retailers that have shown little inclination to collect sales taxes.

Holdouts like Amazon resist collecting sales taxes because they say it would be too burdensome to collect and dispense them on behalf of so many different jurisdictions. And they currently have federal law on their side.

The Supreme Court ruled in 1992 that a company selling only online, or through catalogs or by telephone, is not obliged to collect local sales taxes from customers, except in states where the merchants actually have a physical presence, like a warehouse or a call center. In taxation parlance, such physical presences establishes a "nexus" between the retailer and those states.

Traditional merchants have long argued that their own online divisions are at a pricing disadvantage because they must either collect sales taxes in each state where they also have a store, or must adopt burdensome policies to avoid creating a nexus. For instance, Toys "R" Us had for years barred customers from returning online purchases to its stores, in part because doing so would constitute a nexus between the stores and the Web site.

That is why traditional retailers, seeking to level the playing field, have tended to take sides with the states in efforts to create the same tax rules for all Internet merchants. The main force in this campaign is the Streamline Sales Tax Project, an organization representing 36 states and the District of Columbia. Among other goals, the group hopes to make it easier for companies to collect taxes around the country by having states agree to a common set of definitions about which types of items are taxable and which are not.

Back in November, the group agreed on definitions for about 90 percent of the items on its list, paving the way for representatives to go back to their individual states to start working on legislation that would bring tax codes into compliance with the project's standards. Diane L. Hardt, the tax administrator for the Wisconsin Department of Revenue and the co-chairwoman of the Streamline Sales Tax Project, said last week that at least 31 states were in the process of drafting such legislation.

Ms. Hardt predicted the next step would come this summer, when industry groups like the National Retail Federation and state organizations like the National Governors Association "will go to Congress to ask that those states that enacted tax simplification legislation be allowed to mandate tax collection from retailers that don't have a physical presence in their state."

The sales tax advocates would then have a double-barreled argument for any federal legislators who might resist allowing states to mandate online sales tax collection: not only are states making it easier for retailers to collect taxes for remote purchases, but the nation's biggest retailers are already doing so.

The opponents of online sales taxes say the recent move by Wal-Mart and others to begin collecting the taxes are meant to support such lobbying efforts. "It's a P.R. stunt," said H. Robert Wientzen, the chief executive of the Direct Marketing Association, a trade group for e-tailers and catalog and other direct-mail marketers.

Mr. Wientzen argued that it might be easy for big retailers like Wal-Mart and Target to start collecting sales taxes from their customers "because they have huge tax departments worrying about this issue." But for small or moderate Internet companies "it would be a huge expense and a big deal," he said. "The real Internet companies would really have a tough time doing this."

For Amazon, the decision by Target and Toys "R" Us to begin collecting sales taxes for online purchases puts it in a delicate position. Because Amazon operates online stores for both companies, it will have to collect sales taxes for them — even as Amazon continues to oppose mandatory sales taxes as too cumbersome for itself.

Bill Curry, an Amazon spokesman, said the company already had a "sales tax engine" — software it uses to calculate taxes for Amazon customers in Washington State and North Dakota, where the company has physical presences. To collect sales taxes for Target and Toys "R" Us customers, Amazon takes the tax information the two retailers provide and plugs it into its sales tax engine. "It makes the calculation, we collect the tax, then send it on to the partner," Mr. Curry said.

"That process sounds incredibly easy," he said, "but it's incredibly difficult." Target and Toys "R" Us "have had decades of experience collecting tax at their stores," he said, "so they pretty well know the tax rates on their merchandise."

But Wal-Mart, the world's biggest retailer, offers a much different interpretation of the challenges. The company's Web unit did not rely at all on Wal-Mart's extensive experience with physical stores when it started collecting sales taxes for online purchases on Feb. 1, said David Bullington, Wal-Mart's chief tax officer. Mr. Bullington said the company's Walmart.com division had handled the entire process in six weeks, "and the total head count out there isn't that big to begin with."

The key to the process, Mr. Bullington said, was software from a company he would not identify that tracks state and local sales taxes. The handful of companies that sell online tax calculators include Taxware, a unit of First Data/>, and CCH. Taxware's program costs, on average, $30,000 for a one- to three-year contract, according to a spokeswoman.

Walmart.com's new system "isn't 100 percent perfect" in calculating the right taxes, Mr. Bullington said, "but you've got to start somewhere."

Mr. Bullington said the company had decided to start collecting online partly because Wal-Mart had begun more fully integrating its stores with its online operations — allowing customers to buy items online and pick them up at the store, for instance.

That is a trend among traditional merchants, analysts say. "Bricks-and-mortar retailers are coming to appreciate that the benefits of integrating their store operations with their Web sites outweigh the cost of not collecting tax," said Mr. Cassar of Jupiter.

But because the bulk of bricks-and-mortar companies already collect sales taxes online, Mr. Cassar said, the states may not find much new gold in Internet taxes any time soon. Given the current budgetary woes of state governments, though, even a little gold is enough to start a noisy fight.

[registrars]

[registrars] Fw: [internetbusinessstrategy] Online Sales Tax Battle Turns Ugly

February 17, 2003

The Battle Over Online Sales Tax Turns Acrimonious