A taxing situation.

Will Web commerce stay tax free? The answer is yes--for now

Should internet merchants collect sales tax for states they don't reside in? An Internet-based business is currently not required to collect sales tax outside the states in which it has a "business presence." It's the same story with mail order, telemarketing sales, and other remote merchants. But the e-commerce explosion has some states pushing for a federal law that would force Internet businesses in other states to collect taxes on their behalf.

Although Congress has extended a 1998 moratorium on the issue until October of this year, the debate is certain to reopen in the 107th Congress. This time, the outcome will have an impact on your business--whether it's on Main Street or MainStreet.com.

Some vendors claim it's unfair for local businesses to have to compete with Internet businesses that don't collect sales tax, but others say that shipping charges for online purchases level the field. Some lawmakers claim states are losing up to 5% of revenue, but vendors counter that most Internet sales don't take the place of in-store sales, and are sales that would not have been made if the Internet didn't, exist. States say the taxes are already on the books, so it's right to collect them on the Net. But online merchants say it's not fair to single out Internet merchants when catalog and telephone sales businesses don't have to collect out-of-state taxes. It is this back-and-forth wrangling that Congress will soon have to contend with--again.

"If we require businesses to collect from the 30,000 taxing jurisdictions, it will be impossible for businesses to do that without great expense, says Richard Barton, senior vice president for Congressional Relations for the Direct Marketing Association. "Congress thinks that would be a major burden on interstate commerce, and two U.S. Supreme Court decisions [National Bellas Hess v. Illinois (1967), and Quill v. North Dakota (1992)] said states cannot require a company that does not have a physical location in that state to collect the state taxed," argues Barton.

But not everyone takes that as the final word. Twenty-nine states including New Jersey, Oklahoma, and South Carolina have begun the Streamlined Sales Tax Project, meant to simplify sales tax issues nationwide.

Frank Shafroth, director of state-federal relations for the National Governors Association, wants the federal government to rule that once a threshold number of states have acted to simplify their state and local sales taxes, every state would be required to participate. Shafroth says there would be some funds to help retailers collect, but there's no agreement on what would be "reasonable" help.

According to Charles D. Collins Jr. of the North Carolina Department of Revenue and co-chair of the Streamlined Sales Tax Project, software will simplify the situation. "We have a pilot program with four providers [esalestax.com, Pitney Bowes, Taxware International, and Hewlett-Packard], and we're hoping state legislatures will consider action on our proposals," he adds.

But for small businesses, sales taxes could cool online sales. "We think [sales tax] will have a chilling effect," says Seth Geiger, vice president of professional services for BizRate.com, which has surveyed online shoppers. Not having to pay sales tax was one of the key reasons cited for using such services. "Twenty-nine percent of shopping carts are abandoned, and a good portion of them are abandoned because of hidden costs--particularly the high cost of shipping or sales taxes. Sixty percent of shoppers said they would make purchases less often as a result of having to pay sales tax."

Pia Pialorsi, spokeswoman for the Senate Commerce Committee, says, "The Internet is the engine of our economy today, and it's important that we not stifle it with taxes." The committee plans to reintroduce legislation to extend the moratorium for another five years. For more information on the Streamlined Sales Tax Project, visit www.geocities.com/stream lined2000.