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The Web: Push to tax online sales

By GENE J. KOPROWSKI

CHICAGO, Feb. 2 (UPI) -- State governments finally may have figured out a way to tax online purchases from Amazon.com, Barnesandnoble.com and other Internet retailers. The problem, experts told UPI's The Web, is what the states are proposing, called the Streamlined Sales Tax Project, may not be legal.

"The states have no basis to tax the LL Bean's of the world unless they have a physical presence in the state," said Ken Bezozo, a tax attorney and partner in the New York offices of Haynes and Boone, LLP. "That's because the U.S. Constitution dictates that only the federal government has the right to regulate interstate commerce."

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So far, 40 states have banded together for the Internet tax collection project. Because it is a voluntary effort, however -- and they are asking online retailers to comply voluntarily -- they think they are in the right.

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"It's legal," said John Mikesell, a professor in the Indiana University School of Public and Environmental Affairs, who has been following the project. "There is a long history of state compacts -- agreements. All are voluntary. No state is forced into it."

Last week, the states issued a request for bids from the IT industry to move this project forward. They are asking computer technologists to design software and Internet-based networks to track millions of online sales purchases, and run the processing of tax payments for those transactions. The states are seeking to build a registration system where every Internet retailer -- from mom-and-pop stores to Macys.com -- would declare they are going to collect taxes for online sales. An earlier request for bids, released last November, is seeking technologies to make online sales tax collection easy for retailers.

The project began as a behind-the-scenes effort in 2000 at the height of the first wave of Internet popularity in the United States, when states banded together to modernize tax collection. The plan finally is coming to fruition and the states hope to operate the online sales-tax-collection project by the end of the year.

"If the states are ready, this could be in place for the fourth quarter," said Charles Collins, a vice president of government affairs at Taxware, a software developer in Salem, Mass., and a former chairman of the state streamline project when he worked for the state of North Carolina. "They could be ready to rock and roll on Oct. 1."

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The common assumption among states is they have lost somewhere between $10 billion and $20 billion in taxes on transactions made online since the inception of the commercial Internet during the 1990s.

Over the past five years, Collins said, state governments have passed laws and regulations to simplify their taxes and make them more uniform. That was intended to make it easier for someone someday to design a software system that would allow online retailers to collect taxes -- no matter the state of residence of the purchaser -- with a few simple mouse clicks. This would be much more easy and effective than performing complex mathematical equations and taking exemptions into account.

"Everybody needs to have the same categories of exemptions," Collins said.

State government officials are meeting this July to see if they have reached a consensus. According to the agreement reached by the states, only 10 are needed to launch the project. Collins said 17 states are streamlining their efforts right now, representing 20 percent of the U.S. population.

"It's too early to tell if they will meet the deadline" for uniformity, he said.

Retailers, under this regime, most likely will outsource their sales-tax collection to new online firms, called certified service providers -- essentially tax agents approved by the state governments, Mikesell said. They also can use an automated system to collect the taxes or set up their own proprietary system for that purpose.

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"This is hot right now," Mikesell said of the project.

Years ago, the U.S. Supreme Court, in a famous case, North Dakota vs. Quill Corp., ruled states could not tax catalog merchants for sales made to customers in states in which the merchant did not have a physical presence. In legal-speak, this is called a nexus, Bezozo said. The rule has been used to stop governments from taxing online transactions as well.

"But now," he said, "the states are actually getting smarter. It's scary. It's not just John Doe out there who is getting more informed -- it is the tax man, too."

Last year, Congress year passed laws ensuring that online access is not taxed, but legislators have not addressed taxation of online transactions.

"If Congress does not react, there will be a hue and a cry," Bezozo said. "The states and retailers will argue that you 'can't have two economies.' Taxation must be fair for all. The whole idea behind it is to get the Congress to change its mind about whether the tax responsibilities are an excessive burden on interstate commerce."

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Gene Koprowski is a 2004 Winner of the Lilly Foundation Award for journalism for this column for United Press International. E-mail: [email protected]

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