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September 01, 2005

A New Tax On E-Commerce?

Unlike purchases made in a “brick-and-mortar” physical location, where sales tax is collected at the point of sale and remitted to the state by the merchant, individuals and businesses are supposed to remit the sales tax for their online purchases when they file their state tax returns each year.  This process makes a significant share of the taxes due on these purchases effectively noncollectable, resulting in the reported loss of billions of dollars in state revenue. 

In an attempt to remedy this fact, a number of states are participating in a program called the Streamlined Sales Tax Project, which seeks to harmonize state tax rules and definitions to address the Court’s concerns in Quill Corp. v. North Dakota, 504 U.S. 298 (1997).  Quill held that states may not require merchants to collect and remit state sales taxes unless the merchant is physically located within the state due to, among other things, an undue burden on interstate commerce.  States participating in the Streamlined Sales Tax Project hope that consistent state tax rules and definitions will address the Quill decision and facilitate the passage of a federal law requiring Internet firms to collect and remit sales tax from online purchasers. 

Internet companies, however, have expressed a reluctance to participate in the project.  For example, Amazon.com’s Rich Prem recently stated that “we have no plans to volunteer” for the program.  States have responded to such reluctance by offering businesses that register with the project and begin collecting taxes a one-year amnesty on taxes owed for past Internet sales in participating states.  Such a program may prove attractive to firms such as Borders.com, which was recently ordered to pay use tax for Internet sales to California buyers who were allowed to return their purchases to a brick-and-mortar Borders store.   

Will the Streamlined Sales Tax Project eventually result in a sales tax for items you purchase online?  Stay tuned. 

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