States push to collect taxes on Internet sales

In response, more than 1,100 retailers have registered with the streamlining group and are collecting sales taxes on items shipped to states that are part of the agreement — even if they are not legally obligated to.

The streamlining board also is lobbying Congress to let the participating states do what the Supreme Court ruling banned: They could force businesses to collect taxes on sales made to in-state customers, even if the businesses don't have a physical presence there.

New Jersey, Michigan and North Carolina are among the largest of the 19 states that have adjusted their tax laws to fully comply with the group's streamlined setup. Washington was the only state to join in 2008, but three more states are close to becoming full members of the group. And Scott Peterson, the group's executive director, expects another seven states — including Texas, Florida and Illinois — to introduce legislation in January that would make them eligible to join.

Undoing the patchwork can be difficult, even if the weak economy increases states' motivation to go after online sales taxes. Similar bills have been introduced in several states and failed, sometimes because of the cost of changing tax laws. New York, for example, decided against joining the streamlining board because it would require extensive revisions to its tax rules.

Besides various states and retailers such as Wal-Mart Stores Inc., Borders Group Inc. and J.C. Penney Co., the National Retail Federation, the industry's biggest trade group, also supports the Streamlined Sales Tax group.

Companies that handle Web sales only have organized as well. NetChoice, whose members include eBay Inc. and online discount retailer Overstock.com Inc., supports the states' tax simplification efforts, but its executive director, Steve DelBianco, says online retailers should have to collect taxes only in states where they have a physical presence.

But what if the meaning of "physical presence" is changed? New York essentially did that in April when its budget included a provision requiring online retailers like Amazon to collect taxes on purchases made by New Yorkers.

The new rule requires retailers to collect sales tax if they solicit business in New York by paying anyone within the state for leading customers to them. Since some website operators within New York are compensated for posting ads that link to sites like Amazon, the online retailers would have to collect taxes.

Matt Anderson, spokesman for the New York State Division of the Budget, said the state expects to reap $23 million during the current fiscal year, which ends March 31, from newly collected online sales taxes.

That's a sliver of the overall state budget for the same period, which is $119.7 billion. The state faces a revenue gap of $1.7 billion.

Yet Anderson said the state wants "to level the playing field and end the "unfair competitive advantage" Web-only companies have over brick-and-mortar stores that can't avoid collecting sales taxes.

Amazon complies, and collects sales taxes on shipments to New York. However, Amazon is still fighting the rule. It sued New York in April, alleging its provision is unconstitutional. Amazon also said it is being specifically targeted by the law. The case is pending.

Amazon declined further comment.

Salt Lake City-based Overstock is also suing New York over the law. Unlike Amazon, Overstock is not collecting sales tax in New York, because it ended agreements with about 3,400 affiliates in the state that were being paid for directing traffic to Overstock.com.

The Streamlined Sales Tax group hopes Congress takes up its uniform-tax idea in 2009. Peterson thinks the dismal economy boosts the chances of passage.

But Congress also will be occupied with economic stimulus plans involving bigger pools of money. And Mulpuru, the Forrester Research analyst, notes that for years there has been talk of taxing online retailers.

"It's a legal morass," she said. "In a best-case scenario, it's going to take a while to sort everything out."

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