The Party's Over/Major Web Retailers to Collect Sales Tax

Major Web Retailers Start Collecting Sales Tax
Fri February 7, 2003 08:55 PM ET
By Lisa Baertlein
PALO ALTO, Calif. (Reuters) - The Web units of major U.S. retailers began collecting sales taxes this week as part of a groundbreaking agreement that means higher prices for online consumers and increased revenues for cash-strapped state coffers, retail and state officials said on Friday.

The deal involves eight major retailers, including Toys R Us Inc. TOY.N , Target Corp. TGT.N and Wal-Mart Stores Inc. WMT.N , 38 states and the District of Columbia, officials said.

Under the terms of the agreement the participating retailers would be given amnesty for any prior uncollected taxes in exchange for starting to collect them now.

The shift in tax practices, which may eventually involve more online stores and other states, comes after more than three months of negotiations and arrives as many states are looking for ways to ease slowdown-related budget shortfalls.

The names of the retailers were not made known to the states during the course of negotiations and it was not clear how much new tax revenue the policy shift would generate, said Eleanor Kim, assistant director of tax administration for Texas, one of the participating states.

"We don't really know until they start paying returns. This is tax that's not being collected," she said. Texas imposes sales taxes of between 6.25 percent and 8.25 percent, depending on whether consumers face additional local levies.

Last year, Internet retailers rang up sales of more than $73 billion, according to estimates.

Although traditional retailers have argued that tax-free Web purchases have put them at a disadvantage, Congress has balked at proposals that would have required states to collect sales tax on online purchases.

STREAMLINING TAX PRACTICES

In the meantime, a coalition of states, including Texas, have been working to streamline tax practices in the thousands of U.S. jurisdictions that often treat the same good differently. For example, orange juice is sometimes taxed as a fruit, but sometimes exempted as a beverage.

Retailers with online units skirted the tax issue by separately incorporating the Internet selling arms. Up until now, many of those online stores collected sales taxes only in the handful of states where they had headquarters or operations such as call centers or fulfillment centers.

Walmart.com spokeswoman Cynthia Lin said her company, a subsidiary of the world's largest retailer, had been collecting taxes in nine states where it had operations before it voluntarily began collecting taxes in all 50 states on Feb. 1.

The company already was moving in that direction because it is increasingly integrating its Web and brick-and-mortar operations, she said.

For example, she said, Walmart.com customers now can order tires on the Web and have them installed on at a local store. That kind of activity might have drawn scrutiny from state tax auditors who would have challenged a tax-free online sale, experts have said.

Online giant Amazon.com AMZN.O collects taxes only where it is required to, but began doing so this month on behalf of partners Target.com and Toysrus.com, Amazon spokesman Bill Curry said.

Curry said the new plan is a step forward, but not a fix-all for the woes inflicted on businesses by the nation's complicated sales tax system.

Among other things, he said a single zip code in Denver covers five different taxing jurisdictions with applicable tax rates ranging from 4.3 percent to 8 percent.

He also noted that the agreement does not level the online and offline playing field since physical stores collect sales taxes based on their location while Web retailers figure sales tax based on where a customer lives.

"It's nowhere near ready to take to Congress," Curry said.

California, the nation's most populous state, has not joined the project to streamline state sales taxes and no state has yet passed the legislation that would make it a signatory to the November agreement. Five states -- Alaska, Delaware, Oregon, Montana and New Hampshire -- have no sales tax. (Additional reporting by Kevin Krolicki)