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Online Sales Tax Edges Closer To Reality

Enough state legislatures have signed on to tax-collection system to have it operational next year.
A system that will let states collect sales tax from online purchasers should become operational next year. More than enough state legislatures have passed laws this year to implement the Streamlined Sales Tax Project, said Dianne Hardt, project co-chair and Wisconsin's tax administrator, at a briefing Tuesday.

Legislatures in 20 states, representing about a third of the population of the 41 states participating in the project, have enacted laws to conform with provisions of the tax-collection program. An agreement approved by the states' tax officials last year calls for execution of the sales-tax collection system once 10 states representing 20% of the population of sales-tax-collecting states approve the project.

Though that threshold has been reached, Hardt said, it will take months to verify if each state's law conforms with project standards. She expects the program to become effective either April 1 or July 1.

Many online businesses don't collect sales tax from buyers who live in states where the companies aren't based. Legally, buyers are required to pay a sales tax, known as a use tax, to the state in which they reside, but few do so unless sellers collect the levies. States lose an estimated $200 million a year in uncollected sales taxes from online purchases. The system devised by Streamlined Sales Tax Project establishes processes in which the taxes are collected and distributed to the states.

Businesses have three choices of the technology they can use to collect and disperse sales tax: contract with a project-certified service provider, purchase and deploy project-certified software, or have tax authorities certify a homegrown system.

States participating in the project must agree to the same definitions for taxed items. For instance, fruit juice is defined as a beverage containing at least 50% or more fruit juice. Wisconsin exempts fruit juices only if they contain 100% fruit juice. If the state wants to participate in the project, it would have to agree to exempt fruit juice as defined by the project. Having a single definition for an item makes it easier for businesses serving customers in multiple states to know what to tax.

Though the project has defined for tax purposes most commodities and services, it's still working out definitions for digital property such as downloaded music.

Hardt said businesses will benefit once the tax-collection mechanisms take effect because it will simplify the tax structure, provide greater accuracy for tax calculations, indemnify business from errors, and reduce the scope of potential audits. Because of these benefits, Hardt said, "the business community will put pressure on states that aren't participating to participate."