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Feature

States To Gain From Making Tax System Less Taxing

Wisconsin loses upward of $250 million a year in sales-tax revenue because out-of-state online businesses don't have to collect tax from Wisconsin customers.
Wisconsin loses upward of $250 million a year in sales-tax revenue because out-of-state online businesses don't have to collect tax from Wisconsin customers. That's considerable for a state with a $2.8 billion budget gap this year. But relief is in the works. The Streamlined State Sales Tax Project, a consortium of 40 states, is creating an IT system to standardize the way businesses register and remit state sales taxes. This voluntary program would make it easier for brick-and-mortar businesses that operate in multiple states to collect sales taxes, and it could lead to the collection of sales tax on online sales.

Ten years ago, the Supreme Court exempted businesses from collecting sales taxes from out-of-state customers because of onerous paperwork. But the consortium's project would eliminate such burdens and could lead the court to reverse its decision or prompt Congress to act. "Once the system is simplified, we can convince Congress to apply the same rules to everyone, whether they sell their merchandise from a storefront, over the phone, through a catalog, or on the Internet," says Maureen Riehl, VP at the National Retailer Federation.

Three Links
The tax project plans three ways to connect to its system
Outsourcers provide registration and remittance services with states bearing the costs
Packaged software Links with centralized,
interstate system
Proprietary systems that link to the project's system
Not everyone agrees that this is doable. The Direct Marketing Association, a trade group representing online retailers and mail-order houses, says the plan fails to simplify the tax- collection process. More than 7,500 tax jurisdictions exist, including 45 states and many cities and counties, so regardless of how goods are purchased, simplification will continue to be elusive, association president Robert Wientzen contends. If Congress were to mandate an online sales tax, "it would effectively turn every cataloger and E-tailer into unpaid tax collectors for the states," he says.

Right now, companies register with each tax jurisdiction, a process that itself is quite taxing. When the project becomes operational, businesses would register once online, and the consortium would forward information and payments to participating states. Businesses could use outsourcers, software, or proprietary systems to link to the system. The consortium's plan will go into effect once 10 states agree to participate, possibly as early as spring, says Wisconsin tax administrator Diane Hardt, co-chairwoman of the project's steering committee.

Simplifying the system could provide a windfall to states: A congressional study estimates that they lose nearly $13 billion annually on untaxed Internet sales.