Internet sales tax a hot topic amid state budget crises

May 16, 2003 - Today's retail industry offers the consumer a number of shopping choices. With factory outlets, discount stores and the Internet, an increasing number of Nevadans are comparing prices and weighing options before making purchases. These expanding options have changed and shaped the retail industry. Online retail has not only had a significant effect on the retail real estate market, but on Nevada's economy as well.

Until recently, a majority of retail businesses with online shopping options did not collect sales tax on items purchased from their Web sites. In February, a handful of large retail companies, including Wal-Mart, Toys R Us and Target, voluntarily began collecting sales tax for online purchases. Under a 1992 decision by the U.S. Supreme Court, retailers with an Internet subsidiary are not required to pay sales taxes to states and municipalities unless they have a minimal physical presence in those areas.

Many retail companies without an Internet presence feel this practice creates an unfair advantage. Additionally, shopping center landlords and owners say they have lost customers to Internet retailers; attributing this loss to this competitive advantage. In a national economy that has few signs of significant improvement in the short-term and an uncertain commercial real estate market in many parts of the country, many retailers are campaigning for new laws that mandate the collection of sales and use taxes on item purchases made over the Internet.

Plagued with their own concerns, several states have joined the movement, protesting the loss of millions of dollars each year in money that would support public programs. According to the National Governors Association, state governments will lose an estimated $27 billion this year and $41 billion by 2005 in uncollected sales tax from online purchases. Nevada may lose more than most because of its high dependence on retail sales tax to support public services.

To address growing concerns, a program called the Streamlined Sales Tax Project has established an agreement in which retailers from 37 states and the District of Columbia would collect sales tax on Web purchases, regardless of whether the companies' Internet subsidiaries have a physical presence within the state.

While a majority of Nevada's online retailers do not currently collect sales tax, the state legislature is one step closer to making changes. The state Assembly approved measure AB514 on April 22, and sent it to the Senate for consideration. If passed, the bill would bring Nevada into compliance with the Streamlined Sales Tax Implementing States (SSTIS) Agreement.

If AB514 is approved in Nevada, the Streamlined Sales Tax and Use Agreement would not go into effect until 10 states comprising of at least 20 percent of the nation's population imposing a sales tax have become compliant with SSTIS. Additionally, collection by sellers of sales and use tax on Internet sales would remain voluntary under the agreement until either the U.S. Congress or the U.S. Supreme Court acts to make this tax collection mandatory. In other words, the Streamlined Sales Tax and Use Agreement is not a law, but a request from states to retail companies with Internet holdings to collect sales tax for online purchases.

To date, four states - South Dakota, Kentucky, Utah and West Virginia - have complied with SSTIS. Several more states, including Nevada, have taken steps to change sales tax collection practices among Internet retailers. In fact, the California legislation is currently considering changing state law to require online retailers to collect sales tax if they have stores in the state.

There is still much work to be done in this area; however, the writing on the wall is unambiguous: tax on Internet sales is coming. Some market observers suggest that online sales tax collection will be mandatory in the next five years. And, with nearly every state in the Union facing some level of fiscal crisis, the specter of state legislators will undoubtedly be drawn to businesses viewed as getting a "free ride." By requiring e-tail businesses to collect sales tax, the retail playing field is leveled, and states will receive additional funds for education, public safety, and other vital public services.

Jeremy Aguero is a principal at Applied Analysis, a Nevada-based advisory services company. He can be reached at 702-967-3333.

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Article Copyright ©: J. Aguero, Special to the Business Press