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Archive for Sunday, December 4, 2005

Officials moving ahead on online sales tax

Pact between 19 states is paving the way for collecting Internet fees

December 4, 2005

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Online shoppers could begin paying sales taxes on out-of-state purchases as early as next year, and businesses large and small could get a cut for collecting the money.

Kansas Department of Revenue Secretary Joan Wagnon and her group, the Streamlined Sales Tax Governing Board, have been searching for a way to get businesses to collect sales taxes when they sell goods to customers in other states.

Currently, businesses are not required to collect sales taxes from buyers out of state. But with Internet sales spreading, cash-strapped states are missing out on millions in possible revenue.

A study conducted by the University of Tennessee last year estimated Kansas was losing as much as $81 million annually in uncollected taxes from out-of-state businesses.

Last month, Wagnon's group helped solidify a pact between 19 states, including Kansas, agreeing to search for incentives to persuade businesses to collect the taxes. The states that signed the streamlined sales tax pact would collect taxes from other states and, using tax statements, send the cash back to the states where the sales were from.

"There are huge dividends down the road. Huge," Wagnon said.

Currently, rulings in two U.S. Supreme Court cases forbid charging out-of-state taxes, mainly because of the cost it would inflict on sellers trying to collect unfamiliar taxes and funneling the cash back to the right states.


John Hood packs books Thursday afternoon at J. Hood Booksellers just north of Baldwin. A former store-front business, the company now sells entirely through the Internet. Figuring taxes for out-of-state customers would be an undue burden for the company, Gloria Hood said.

John Hood packs books Thursday afternoon at J. Hood Booksellers just north of Baldwin. A former store-front business, the company now sells entirely through the Internet. Figuring taxes for out-of-state customers would be an undue burden for the company, Gloria Hood said.

Some small business owners said collecting the money would cost them both cash and time, not to mention removing an incentive for out-of-state customers to shop with them online.

At J. Hood Booksellers, a former store-front business that went entirely online five years ago, Gloria Hood ships books around the country daily. If she had to figure and charge customers other state's sales taxes, she said, her business could suffer.

"It's an undue burden on a business owner to do that," she said.

Diane Meredith, who owns The Dusty Bookshelf stores in Lawrence and Manhattan, said she couldn't imagine having to worry about other state taxes when she ships books outside of Kansas.

"The last thing any of us need in the small business world is more complications," Meredith said.

To help sellers, Wagnon and the board's executive director, Scott Peterson, have proposed incentives for businesses in the 19 states, including giving sellers a cut of the taxpayer money they collect.

Peterson said that a study to find out the needed percentage was nearly complete, but the details of the study, including the exact percentage retailers might receive, wouldn't be made public until the end of the year.

Regardless of the exact percentage of tax money available for businesses, the more they collect, the more cash they would receive. That means large merchants, such as Target or Wal-Mart, stand to gain tens of millions of dollars in taxpayer money for complying with the program.

Peterson said the proposal would also account for the logistics of collecting unfamiliar taxes, assigning certified service providers to help companies calculate and collect taxpayer money.

Seven companies have offered to collect the cash, and Peterson said the forthcoming study would also analyze their ability to accurately charge a plethora of local and state taxes from the 19 states.

For the remaining states that charge sales tax, a more permanent mandate could be on the horizon. A U.S. Senate bill expected to go through Congress would require retailers to charge Internet and mail order customers other states' sales tax when it applies.

A similar federal bill failed in 2003 and 2004, and Peterson said that opponents who believe the plan is too complicated and intrusive would be out in force again.

But Wagnon said that the current multistate pact, and her group's plan to help retailers pay for the service, could show Congress that a streamlined sales tax works for states that need the cash and retailers that collect it.

"Every time we make progress, it gets closer to being a possibility," Wagnon said.

Comments

Liberty 9 years ago

Sounds like a great plan to destroy the internet. Way to go Kansas! Not to mention that it is unconstitutional. But what Kansas "official" reads the constitution?

Richard Heckler 9 years ago

If a business is a supplier could it be exempt? I have paid sales taxes doing business on line...no big deal. If each state could collect sales taxes it just might curb the need to raise taxes further.

Densmore 9 years ago

This is not "Joan Wagnon's Group." Kansas is one of the leading states in the Streamlined Sales Tax Project (SSTP), which began long before Joan Wagnon became Secretary of Revenue.

Here is a short history (Unable to properly italicize or underline court decisions due to software limitations. Sorry.):

National Bellas Hess set the standard for taxable nexus: a business must be physically present in the state before a sales tax collection responsibility could be imposed on the business. See National Bellas Hess, Inc. v. Illinois Rev. Dept., 386 US 753 (1967). Subsequent to National Bellas Hess, North Dakota attempted to impose a sales tax collection responsibility on out of state vendors who had no physical presence within the state. North Dakota lost in the U.S. Supreme Court, due to constitutional problems. See Quill Corp. v. North Dakota, 504 US 298 (1992). In addition to constitutional concerns, the Court noted the difficult administrative burden that would be placed on the out of state vendors if ND were to prevail. Several states seized on that aspect of the decision, and launched the SSTP, which was meant to simplify the administrative burden, by creating uniformity among the various state and local jurisdictions. It was their hope that they could take the simplified plan to Congress and get federal legislation that would overturn Quill. Despite the incredible time and expense spent on the SSTP, there is no indication that Congress will support the states. If Congress does not support the states, Quill will remain the law of the land, and physical presence will be required before the duty to collect sales tax can be imposed on an out of state vendor.

Physical presence as a standard for taxable nexus is an out-dated concept. It was created in a day when most commerce involved the local sale of tangible personal property. Today, we conduct business in a much more complicated economy and taxation should change to reflect current realities. One such reality is that a business does not have to be physically present to conduct business. The standard of physical presence for taxable nexus should be changed to reflect today's economy. The new standard should be one of economic presence, such as was established in income taxation many years ago. See Geoffrey, Inc. v. South Carolina Tax Comm'n, 437 S.E.2d 13 (S.C. 1993), cert. den., 510 U.S. 992 (1993). Otherwise, our local businesses are placed on unequal footing with regard to out of state vendors, both internet and mail order. Small local retailers will go the way of the dinosaur.

Densmore 9 years ago

I concluded the above with "Small local retailers will go the way of the dinosaur." That was an overstatement. Many small local retailers may be hamstrung by the disparate tax treatment and forced out of business. Many will not be forced out. What is certain is this: local businesses are at a competitive disadvantage and this will continue and presumably become more pronounced unless Congress acts. Also, if Congress ignores this problem, the states will look to increase other taxes, e.g. income tax, property tax, fuel excise tax, to recoup the lost sales tax.

xtronics 9 years ago

The proposed "sales tax pact" is short sided and a bad idea. We already have a sales tax (dishonestly named a "use" tax) that honest people pay on Internet purchases. As a small Kansas Internet merchant, tax collected on our in-state sales are less than the cost of doing the paper work. This scheme will greatly increase the burden of paper work and reduce our ability to compete which will have us seriously considering moving out of state. How much money will Kansas lose by driving out Internet firms to states that either have no sales tax or are not part of this ill conceived pact? This tax will be a disproportionate burden on small businesses - the very businesses that grow to employ the workers of tomorrow.

Now the latest twist of this sales tax scheme is they now want to offer the seller a cut of the tax. How stupid can this get? If a merchant wants to increase the revenue on a sale, all we need to do is raise our price.

This tax scheme makes out-of-state prices more expensive which drives customers to merchants in non pact states. Not only will Kansas not collect the dreamed of revenue, the money coming into the state will be shifted to non pact states and companies will move out. Kansas has a lot to lose.

Do we really need yet another tax burden? Government can not forever continue to grow at two to three times the rate of inflation. At some point, everyone would work for the government and no one will be left creating the wealth to be taxed. The present course, now embraced by Democrats and Republicans alike, will end up ruining our economy which history has shown will end with our children sent off to wars of distraction. I want a better future for my children.

Densmore 9 years ago

xtronics:

Why should out of state internet retailers have a competitive advantage over the brick and mortar stores in Kansas? Why should a Kansas internet retailer have a competitive advantage over a Colorado brick and mortar store? If you can explain that to me, your post might be taken seriously. Otherwise, you appear to be crying foul simply because the states want to put you on an equal playing field with the non-internet retailers.

You ask "Do we really need yet another tax burden?" This is not another tax burden. This gives the state the authority to collect the sales taxes that are already in the books.

You ask "How much money will Kansas lose by driving out Internet firms to states that either have no sales tax or are not part of this ill conceived pact?" ANSWER-an insignificant amount in comparison to that which will be gained, andf here's why:

If Congress gives the states power to force internet vendors to collect the tax, the 19 states that are on board now will be rapidly followed by the 31 that are waiting to see what happens.

As far as moving to a state without a sales tax, there are four or five. In any event, the state to which your sales are destined will have the power to require you to collect the tax, not just the state in which you set up your internet business.

From your post; "Government can not forever continue to grow at two to three times the rate of inflation." That statement is your way of trying to distract from the issue at hand. The issue is about making the playing field level and collecting taxes that are already on the books. It is not about you paying more in taxes. You would be required to collect the tax from purchasers and remit it to the appropriate jurisdiction, just like the retailers on Mass Street must do.

You feel that your ox is being gored, so you are against the collection responsibility. Big surprise. But your ox will not be gored. The corner retailer is the one who has been harmed by the proliferation of untaxed sales over the internet. It is the local retailer that might be driven out of business-the guy who is also paying property and income taxes as well.

Your arguments are erroneous and totally without merit. If Congress acts, it will be to protect business, which is why most Kansas businessmen are in favor of the SSTP.

Densmore 9 years ago

My apologies to businesswomen. I meant to say: "Your arguments are erroneous and totally without merit. If Congress acts, it will be to protect business, which is why most Kansas businesses are in favor of the SSTP."

Jamesaust 9 years ago

Densmore provides an excellant summary of the legal constraints to sales tax collection between the States. I recommend it to those needing a more thorough explanation than that provided by the article. The end point is fully valid: interstate sales tax collection significantly affects interstate commerce and as such, constitutitionally, is regulated by Congress. While the Court may emphasize, in the gulf left by inaction by Congress on the point, the need for administrative simplicity, Congress is more likely to be motivated by political considerations.

One quibble would be the policy recommendation from the Geoffrey case. I believe that there is a significant distinction to be made between income taxes and sales taxes. Income taxes of course are a tax on the economic entity itself and are applicable where that entity's existence in the State is significant enough for it to be considered 'to exist' there, even if not headquartered, etc. A sales tax is collected from that entity as an intermediary between the State and its own citizens. If the entity does not have a sufficient presence in the State to be otherwise so controlled, this imposes a burden beyond that of more local business entities. That burden is not only the burden of understanding the unique local rules about taxation but also the burden of 'speaking' locally. Business entities of course do not vote but LOCAL business entities often have unique contacts with the voting public and with government officials that allow an influence on many public policy matters. Non-local business entities, even with an 'economic presence,' do not have such an 'entree' into the corridors of power (at least, not without substantial investment of time and money). As such, they are always on an unequal footing with local business.

usaschools 9 years ago

This is such a load of crap. If you call a business on the phone that is out of state you don't pay sales tax. We are overtaxed for the wrong reasons as it is. This is simply a tax increase that they are trying to slip by without taking due credit. Local businesses can sell to out-of-state customers just as out-of-state businesses sell to local customers.

Jamesaust 9 years ago

" Government can not forever continue to grow at two to three times the rate of inflation."

Not true. Government by its nature will always be relatively more expensive over time. While government must bear the effects on cost increases just as you do, government finds it quite difficult to take advantage of productivity improvements that, over time, allow you to operate in a less costly manner. This is due to the intensive need for direct, personal "service." Example: court trials, which today take just about as much time to conduct as they did 10, 50 or 100 years ago, even while the costs have only increased, especially labor costs. A trial that today might cost the taxpayer $1,000 probably cost (adjusting for inflation) $500 a century ago.

" At some point, everyone would work for the government and no one will be left creating the wealth to be taxed."

Not true. Concomitantly, the private sector IS able to take advantage of productivity measures in many areas and therefore employs fewer persons to produce the same measure of output. Indeed, particularly in manufacturing, we are moving towards a 'no worker' system, where, say iron ore, is produced without the legions of workers who once endured the dangerous, difficult work. This both reduces the cost of production over time (so as to allow payment of more taxes, no doubt) and frees the worker to do other, more productive (and perhaps more satisfying) things. I for one have not noticed an abundance of butlers, ladies' maids, kitchen boys, and buggy-whip makers sitting unemployed by the roadside.

Jamesaust 9 years ago

"If you call a business on the phone that is out of state you don't pay sales tax."

Actually, you engage in tax avoidance, which is a crime. YOU are REQUIRED to remit sales tax. Its just difficult and unproductive for Kansas to (a) identify you and (b) prosecute you, for not paying your $11.53 in sales tax on your order of a "salad shooter."

"We are overtaxed for the wrong reasons as it is."

I'm not certain what the 'right' reasons are. However, its a free country and if you want Kansas to tax less, so instruct your Senate and House representatives. Goodness knows, Kansas could CHOOSE to exempt out-of-state transactions from sales taxes but it might be difficult to explain why property or income taxes must be higher as a result.

Densmore 9 years ago

usaschools:

I don't understand your point. You said:

"If you call a business on the phone that is out of state you don't pay sales tax."

Here are the facts:

If you call the out of state business and order goods, and if the out of state business also has physical presence in Kansas, they will charge you sales tax. That is the law and it is strictly enforced on the vendor.

If you call the out of state business and the out of state business has no physical presence in Kansas, Kansas law requires you to self-assess the tax on the goods that you receive. It is called the Compensating Tax (K.S.A. 79-3702) and is commonly referred to as the "use" tax. It is easily avoided, as the state does not have enough tax auditors and/or a sufficiently sophisticated audit selection mechanism to identify even a small percentage of those who have not remitted the tax. That is why there is a push to force the internet retailers to collect the tax. So, it is not a tax increase, but the attempted recovery of $81,000,000 in avoided/evaded taxes.

cowboy 9 years ago

The cries of internet sellers rings hollow when it comes to tax whining. Its a cost of doing business folks. do you also not want to pay workers comp on your employees once you get large and have a warehouse , whats next ?

newssleuth2814 9 years ago

I think if government officials were smarter with spending we wouldn't be taxed so much. Everyone can argue this until they're blue in the face, but the point is that it seems government is out to squeeze every little penny out of us that they can. I'm sure there's someone out there who would argue saying why it's necessary, but no matter how many pretty words you use, the end result is still state officials looking for another way to tax me double or triple what they already collect.

On that note, if I discover a way to screw Kansas out of squeezing more money from me as I shop or do anything, I'll do it without batting an eye. It's not much, but that $11.53 I save from not paying out of state sales tax means in one small way, I won and those Kansas officials can sit on their thumbs and rotate for all I care.

Rooster2 9 years ago

You rock Marion! It seems everyone for this tax has a latent "I forgot I was in business and need to think." attitude. The first internet sale was made in 1995 and we have not stopped since. As progressive entrepeneurs change the face of commerce lazy businessmen and women will all fall by the wayside just as the people that thought cars were a fad.

gr 9 years ago

Although it seems I'm a few days late in responding, the more I think about this taxation silliness, the more frustrated I become. Although Marion had brilliant thoughts, I didn't see anyone suggest what I believe is the most obvious solution.

Let's analyze part of what the article stated. It said "cash-strapped states are missing out on millions in possible revenue" and "Kansas was losing as much as $81 million annually". Does anyone consider asking the question, "Why"?

Why are Kansas residents buying from other states? Taxation is a reward and punishment system - more on the punishment side. By some means, Kansas has created a hostile environment for businesses so they locate in other states - $81 million worth! Kansas has basically said, we don't like businesses so we'll punish them. So, they'll leave - or become creative as Marion demonstrated. Now, Kansas wants to cash in on what they chased away.

If I drive over to Kansas City, Missouri, and buy an item from a store and don't use it until I get home, I pay Missouri's tax. However, if I let my "fingers do the walking" and order the exact same thing from the exact same store over the phone or internet, I am supposed to pay Kansas tax. Why? Who came up with such a hair-brained scam? Oh, yeah. The tax people.

So, now they want to share some of the tax money with businesses who collect it. Can anyone say, "special tax break"? Do you see what's in the future. You have to collect infinite varying amounts of tax depending upon each person who purchases something, except you can keep some of it, unless you collect over so much, except if you are in a certain line of business, up to a certain limit, and then more above another limit, provided you fill out the proper paper work, unless it's a special year....

gr 9 years ago

What if a Kansas business, taxed Kansas rates, and a business in Missouri, taxed Missouri rates, etc? If all states taxed equally, there would be no problem. Businesses would be free to choose any state they want. And if some state doesn't wish to have businesses to locate within it, they have the power to raise the tax rates to encourage them to go elsewhere. None of this complexity is needed. Of course, there is the problem of a multi-state business or overseas businesses, but don't those issues currently exist? Make it a source taxation. That makes more sense than destination. Destination based is not really equal and fair since I can drive to another state - although Kansas tax forms seem to imply you are even supposed to pay tax on those things. Is that confusing or what! Someone who is buying a new car from a different state with higher taxes should try to tell the dealer they want to pay the tax rate at their hometown. If they don't go for it, contact your local city/county office and tell them how much they missed out on.

With this proposed hair-brained system, businesses cannot be encouraged or discouraged through sales taxation. However, Kansas, and others, are attempting to make it hostile to the residents and discourage them from locating in Kansas. This way, states, which would like to attract more people, can lower their sales tax.

I'm not sure that's the best way.

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