Tax-free online shopping may be ending

Deseret News (Salt Lake City), Jun 20, 2005 by Bob Tedeschi New York Times News Service

Those who believe that death and taxes are the only sure things in life have not spent much time with online retailers, who have largely avoided paying most sales taxes.

But that situation appears to be near an end.

Late last month, a California state appeals court found the bookseller Borders Inc. liable for $167,000 in taxes from April 1998 to September 1999 because the company had commingled the operations of its online subsidiary and its stores in that state. The ruling, along with other efforts by state tax collectors aimed at Internet sales, could signal that the era of tax-free online shopping is drawing to a close.

A Supreme Court decision in 1992 said that mail-order merchants, and, by extension, online retailers, need not collect taxes on behalf of their customers' local jurisdictions unless those customers are in a state where the business operates.

Traditional retailers have long complained that Amazon and others have largely avoided state tax collection and have bemoaned that such practices allow the online retailers and catalog companies to sell goods at lower prices. At the same time, government officials in the 45 states that levy sales taxes have lamented the forgone revenues, particularly since 2000, when Internet sales spiked and many local economies slowed.

According to Scott Brandman, a lawyer with the firm of Baker & McKenzie, which is representing Borders in the California case, the appellate court's decision "could be used by states to reach out to new levels they haven't reached out to before."

Brandman said the California court failed to account for the fact that Borders.com and Borders Group were separate corporate entities. Therefore, he said, states could rely on this decision to say that when online companies use an unrelated offline business to promote themselves, the online company would then have to collect taxes in states where the offline business operates.

That could, in theory, include the country's largest online retailer, Amazon.com, which now operates Borders' online store.

Borders had contended that because it set up a separate company to run its online operations -- and that company had no offices or staff in California -- it was not obliged to collect sales taxes from California residents, even though the company ran 129 Borders and Waldenbooks stores and a distribution center in that state.

The California court said that since Borders' California stores essentially acted as agents for Borders.com -- by, among other things, accepting book returns from online customers -- it must collect the tax for the state.

Craig Berman, an Amazon spokesman, said that the California court's decision would not change Amazon tax policies. "We have no ownership interests in any of Border's entities, so we still don't have a physical presence in California," he said.

The company currently collects sales tax from customers in Washington, where Amazon has its headquarters, and North Dakota and Kansas, where it operates warehouses and customer service centers.

According to Bill Fox, a professor of economics at the University of Tennessee, states will forgo more than $18 billion in tax revenue associated with online purchases this year.

To turn that tide, state tax officials have sought to void the 1992 Supreme Court decision, Quill v. North Dakota, which held that it would be too burdensome on businesses if they were required to collect and remit sales taxes on behalf of the 7,600 state and local taxing jurisdictions across the country.

Since 2000, more than 40 states have participated in the Streamlined Sales Tax Project, which, among other things, seeks to establish common sales tax rules and collection methods across states. The project is helping to create and distribute software for businesses to help them easily collect the taxes.

By showing that tax collection represents no substantial burden to businesses, the project hopes to spur federal legislation allowing states that have simplified their methods to mandate tax collection from retailers that do not have a physical presence in their state.

According to Diane L. Hardt, the tax administrator for the Wisconsin Department of Revenue and the co-chairwoman of the Streamlined Sales Tax Project, the effort will culminate this month during a meeting in Chicago, in which she expects at least 10 states to announce that they have simplified their tax methods. Twenty-one states, she said, have passed legislation at least partly doing so.

Hardt said she expected that federal legislation supporting sales tax collection would be introduced in Congress "within days" of the meeting. Already, tax and businesses officials have said that the success of the legislation could hinge on a lobbying battle between the behemoths of online commerce, eBay and Amazon.

EBay said it believed that any legislation requiring sellers to collect state sales tax should exempt businesses that sell "in the range of $5 million" annually, according to Hani Durzy, an eBay spokesman.