Monday, February 10, 2003

Some major stores taxing online sales

The Associated Press

NEW YORK - Some major retailers this week began voluntarily charging online sales taxes in 37 states and the District of Columbia, a move that could reshape the way business is done on the Web.

Participating brick-and-mortar retailers, such as Wal-Mart, Toys "R" Us and Target, hope their first steps will help bolster the states' effort to mandate online sales taxes, leveling the playing field between themselves and Internet-only rivals.

Under current laws, catalog companies and pure online retailers only have to charge sales taxes in states where they have operations, such as a warehouse or distribution facility. Nationwide brick-and-mortar retailers say this puts them at a disadvantage in states where catalog and Internet-only companies do not have operations.

"We can't have a system that discriminates some vendors in favor of others," said Frank Shafroth, director of state-federal relations for the National Governors Association. "Why should there be a double standard?"

The major retailers said the move also helps them integrate their online and brick-and-mortar operations.

The states, meanwhile, are eager to plug their budget shortfalls with help from Internet sales taxes. Last year, Internet sales ballooned to $79 billion, or about 3 percent of all retail sales, according to Forrester Research.

John Coalson of the Atlanta firm Alston & Bird, who represented the merchants, said he expects five more states to join in the 37-state program begun this week. He would not name the states.

However, representatives of 34 states and the District of Columbia met in Tampa last month to discuss taxing Internet sales. Those states are: Alabama, Arizona, Arkansas, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma,Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.

Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect sales tax.

Representatives for pure online retailers and catalog companies called the pact a non-starter.

"This is just a marketing ploy," said Lou Mastria, a spokesman at the Direct Marketing Association, which represents catalogs and pure online retailers. He believes brick-and-mortar retailers should be forced to charge taxes online in any state where they have a store.

Mastria also said that pure online players and small catalog companies do not have the resources to handle complicated state and local tax laws.

"It's unfair to burden them with the huge cost of complying with various sales taxes," Mastria said.

As part of the accord, the participating states agreed they won't collect taxes from past sales, according to Coalson.

In the past, many retailers had set up subsidiaries so they could avoid charging online sales taxes in states in which they operate stores. But as they started blending their online business with their stores to create better synergies, they created more tax liability.

"In order to allow consumers to return merchandise bought online to our stores, we need to charge sales tax," said Susan McLaughlin, a company spokeswoman at Toys "R" Us.

Target Corp. spokeswoman Kathy Wright said has been charging sales tax in the 47 states that it operates stores, but this week started collecting tax on online sales at Target's Web store on and on its Marshall Field's division's online site.

While Shafroth said the latest development "won't be a big plug" to states' financial shortfalls, if the agreement became national, it would have a dramatic effect.

He estimates that next year, there will be $35 billion of state and local revenues from uncollected taxes on e-commerce. That will jump to $50 billion in 2008, he said.

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