Internet Commerce and
State Sales Taxes
Scott Mackey, Kimbell Sherman Ellis
See Bill Status Chart

States, Congress, retailers and the Internet industry are grappling over whether - and how - state and local sales taxes should be applied to Internet transactions. In 2001, twenty-two states passed legislation to join in an effort to finalize and implement the so-called Streamlined Sales and Use Tax Administration Act. The goal of this multi-state effort is to create a simplified, technology- based system to collect and remit sales taxes on Internet sales and other "remote" purchases. Such a system would dramatically simplify sales tax collection and administration for sellers that operate in multiple states.

The key to the success of this effort will be how far states will be willing to go simplify their sales tax policy and administration. Such simplification will require states to relinquish some degree of control over their sales and use tax policies, in exchange for participation in a simplified system that will provide additional revenues from use taxes that currently go uncollected on remote sales.

States currently cannot require out-of-state sellers that lack a physical presence to collect sales and use taxes on sales to in-state residents, even though the tax is legally due. This gives remote sellers a price advantage over in-state sellers, who are required to collect the tax from customers. Congress has the authority to require remote sellers to collect sales taxes, but has been unwilling to require collection because the complexity of state and local tax systems would unduly burden sellers.

It is this "undue burden" that states are hoping to eliminate by working together to streamline their sales tax systems. Many large, multi-state retailers are supporting this effort because they stand to enjoy significant reductions in compliance costs if the effort is successful. Retailers that currently must compete with remote sellers that do not collect sales taxes also support this effort, arguing for a level playing field.

In the 2001 session of Congress, a proposal to endorse this multi-state effort as a step toward requiring remote sellers to collect taxes was narrowly defeated. Instead, Congress extended the moratorium on taxes on Internet access for another two years. Many observers expect that when the moratorium expires at the end of 2003, states must have developed and implemented the streamlined system and demonstrated that it works if they ever expect Congress to pass legislation requiring remote sellers to collect sales and use taxes.

The twenty-two states that passed legislation last year - the so-called "Streamlined Sales Tax Project Governing States" - met in November and developed an ambitious timetable to complete their work by Labor Day. These states decided to use the work of the Streamlined Sales Tax Project as the basis for final decisions on the contents of the agreement.

If the states succeed, it will prove to Congress that states are capable of working together to confront the difficult tax and regulatory issues posed by an increasingly global, Internet based economy. If they fail, our national model of fiscal federalism may need to be reconsidered as it collides with the reality of the global economy.

Scott Mackey is an economist and associate at Kimbell Sherman Ellis. He is a nationally recognized tax expert that manages major client projects on telecommunications tax reform.

Find out more:
Streamlined Sales Tax Project

Organizations Supporting the Streamlined Sales Tax Project:
National Retail Federation
National Governors’ Association
National Conference of State Legislatures
E-Fairness Coalition
International Mass Retail Association
Electronic Commerce Association

Organizations Opposing the Streamlined Sales Tax Project:
CATO Institute
Americans for Tax Reform

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