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States Agree to Simpler Sales Tax System

In a controversial decision that may leave Web-based and mail-order retailers in a tizzy, 31 states this week decided to simplify their sales tax structures so that Internet and Main Street retailers would be on the same page when it comes to collecting sales taxes.

The plan is, in part, a move to get the OK from Congress to have a nationwide mandatory online sales tax collection system. Traditional, brick-and-mortar retailers have demanded such a move since the catalog-sales business took off in the 1980s, followed by the Internet retailing boom in the late 1990s.

"Basically it's to treat the transaction or the sale of items the same way no matter how they buy it for purposes of sales tax … so that what something means in one state means the same in another state," whether it be online or in a store, said Neal Osten of the National Conference of State Legislatures, which has been leading states' efforts.

At present, only mail-order or Web customers who live in states in which vendors have a physical presence have to pay sales tax. In other words, Washington state residents, but few others, pay that extra bit for books bought on Washington-based Amazon.com, and only Maine dwellers do so for L.L. Bean hunting boots.

Not only do states have different collection rates and rules, but more than 7,000 local jurisdictions do as well. Meanwhile, the entire states of New Hampshire, Delaware, Montana, Oregon and Alaska don't have any sales taxes at all.

"The states' sales tax systems are nearly as complicated as the IRS tax code," said Maureen Riehl, a vice president at the National Retail Federation, a trade group that represents nearly 1.4 million stores that supports tax simplification. "This is a nightmare for retailers doing business in multiple states and for consumers who travel from state to state."

During the boom years of the late '90s, states were flush with income-tax cash and some legislators were reluctant to kill the Internet golden goose, but with the economy in a downturn, the states collectively face a $50 billion budget deficit for the current fiscal year.

The states' decision doesn't mean that sales taxes will begin to be collected tomorrow. Rather, it's the first step in complying with a 1992 U.S. Supreme Court decision that ruled that sales-tax laws needed to be coordinated before out-of-state revenue could be collected.

As a result of that ruling, the Streamlined Sales Tax Project was set up. When at least 10 states representing 20 percent of the U.S. population have joined, those states involved will ask Congress to make the system mandatory as of 2006. On Tuesday, thirty-one states said they would begin to implement the program.

The plan would maintain a single statewide tax rate for each category of product, such as clothing or food. The way things are now, for example, marshmallow may be defined as a food in one state, but as a candy in another.

But there's still a question as to how the plan will garner the support of online and catalog retailers.

Many states sales-tax reporting laws are hard to enforce, so states hope to convince out-of-state vendors to collect sales taxes voluntarily by sharing the tax revenues they remit. About one-third of all states share sales tax revenues with online retailers now.

Osten said another way states may try to entice businesses to volunteer in the sales-tax plan is to give amnesty to those businesses who may have been faulty in collecting and remitting sales taxes in the past.

Internet and mail-order businesses of all sizes aren't likely to warm to the idea that even if they only have a physical presence in a few states but serve customers throughout the country, they still have to pay the price of collecting sales taxes.

This may harm small businesses, which may have a harder time paying for the technology needed to calculate the taxes.

"When the economy is already sagging and times are tough, to add another brand new tax out there is foolish and about the most destructive tax policy I can imagine," said Darrell McKigney, president of the Washington-based Small Business Survival Committee, a lobbying group that represents small business interests. "It's government greed at its worst."

Other critics say the tax plan just another way to tax the Internet.

"It's going to inhibit interstate commerce," said Grover Norquist, president of the Washington-based Americans for Tax Reform, which opposes any sort of tax hikes. "You have taxation without representation. ... It's very dangerous to allow people to tax people outside of their jurisdiction."

State lawmakers are simply "desperate to come up with a blame for someone for overspending," Norquist said.