An end to the free online tax ride nears

Computerworld - WASHINGTON - Ken Knezek, who owns a business that sells footwear, understands the importance of a sales tax. His business is in Texas, which doesn't have an income tax.

Knezek's company, Bandals Southwest, sells Bandals Footwear, a woman's shoe with some 60 patents for its interchangeable bands, has sales reps in about a half dozen states. This created physical nexus for him, and thus an obligation to collect sales taxes.

There is no way that Knezek said he can administer sales taxes by himself. In one state where he collects taxes, Oklahoma, the city of Tulsa has three different sales tax rates. He hired Tax Cloud, a company that uses Amazon's cloud, to manage his taxes.

Tax Cloud is integrated with 3DCart, a shopping cart service that Knezek uses. He paid a one-time fee for this integration. Sales taxes are automatically calculated, and each month reports are generated. Tax Cloud is reimbursed by the states for its collection, and Knezek pays nothing for the reports.

That is how Knezek solved a problem that Congress has wrestled with for more than a decade. It is an issue that lawmakers seem to be closer to addressing, and if they act the earliest will be during the lame duck session.

There are several active bills, such as the Senate's Marketplace Fairness Act, that impose a tax collection obligation provided states simplified taxes and eased tax collection burdens on remote sellers.

The pressure to do so is not going away. In the fourth quarter of 1999, online retail sales accounted for .64% of total retail sales, or $5.3 billion. Today, in the second quarter of this year online sales represented 5.1% of total retail sales or nearly $55 billion, according to government estimates.

Millions of Americans avoid paying sales taxes because online sellers are under no obligation to collect them. Buyers still owe a use tax to the states, but most don't pay it.

For a state such as Pennsylvania, for instance, the inability to collect sales taxes from remote sellers is costing as much as $410 million in uncollected taxes this year, according to Robert Strauss, a professor of economics and public policy at Heinz College, Carnegie Mellon University, Penn.

The states are getting desperate. They are resorting to legislative and regulatory guerrilla warfare in an effort to force online sellers to collect and Congress to act.

Colorado mandated that out-of-state retailers report purchases by state residents to its tax authorities, who will then get a tax bill. It was declared unconstitutional in federal court earlier this year and is being appealed.

Another method gaining traction in states is to declare that advertising agreements, such affiliate ads, create physical presence for retailers. One such law in Illinois was struck down in federal court earlier this year.