E-Commerce – Coming to a State Near You: Internet Sales Taxes

In February, three major retailers took a giant?and controversial?step toward integrating their online and brick-and-mortar stores. Target, Toys “R” Us and Wal-Mart announced that they would begin levying a sales tax for online purchases.

They’re not the first. Circuit City and Sears, for example, already have uniform tax collection and remittance procedures across their two sales channels and have made significant inroads in integrating their online and physical stores. The recent move by those three retailers comes when many states, suffering from the worst budget crisis in years, are working to streamline sales tax collection?an effort that could lead states to pass legislation that would force Internet retailers and cataloguers to start charging sales tax regardless of where they do business. (Massachusetts isn’t waiting; it started this year asking tax filers to account for out-of-state purchases.)

Before Feb. 1, WalMart.com, Target.com and ToysRUs.com charged sales tax only for goods bought online in states where they had what’s called “nexus,” or a physical presence such as a retail store, distribution center or call center. This practice followed a 1992 Supreme Court ruling on states’ rights to charge a sales tax.

It turns out that for the national chains, this is more than a tax issue. There’s a customer service component (shoppers like being able to return online purchases to a local store) and a systems integration challenge (it takes some doing to calculate sales taxes across state and local jurisdictions). Charging sales tax in some states but not in others has made it impossible for Target, Toys “R” Us and Wal-Mart customers to drive to a local store to return items they ordered online because the tax-free totals on their online sales receipts didn’t equal the taxed totals tallied by store clerks, according to Kate Delhagen, a Forrester Research analyst. “Those guys were getting a little frustrated from hearing from their consumers, ’Why can’t we return this stuff to any store?’” she says.

When Target, Toys “R” Us and Wal-Mart established their Internet operations, they spun them off as entities “separate from the mothership” so that they didn’t have to charge or collect taxes in the states where their physical stores existed, says Delhagen. “Now, they’re in the process of undoing the dotcom spinout,” she says. And retailers such as Circuit City and Sears that kept their Internet stores under the watchful eye of corporate headquarters are a step ahead, she adds.

The march by brick-and-click chains to assess taxes for online purchases would put pure e-tailers such as Amazon.com on the same playing field, of course. (Though even Amazon.com charges sales tax in Washington state and North Dakota, where it has some operations.)

Since the Streamlined Sales Tax Project began in 2000, 39 states and the District of Columbia have joined to simplify their complicated sales tax laws and collection procedures. One of the project’s proposals is to fix loopholes where remote sellers aren’t required to collect sales taxes.

And there’s money in those clicks. A University of Tennessee study shows that states will miss out on $440 billion worth of revenue from remote sales between 2001 and 2011. The issue of collecting taxes on online purchases had been under a moratorium since 2001, but that is scheduled to be lifted in November, which will likely renew public debate over the issue. “We have long been supportive of streamlining and simplifying the sales tax system,” says Cynthia Lin, a spokeswoman for WalMart.com. “It’s also our belief that all retailers should be required to collect sales tax for all sales.”

That sentiment is music to governors’ ears around the nation, whose association is lobbying Congress to pass a bill that lets states adopt Internet sales taxes. Stay tuned.