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There are several reasons why many states have had trouble balancing their budgets in recent years. The most obvious is the worst recession in decades and its lingering aftereffects, but another is the decline in sales-tax revenue due to people buying more items online.
It has been estimated that such purchases have cost all states collectively upward of $15 billion a year in lost revenues. That could change soon, though.
Under current law, Internet sites that don’t have a physical presence in the same state as someone who purchases items from them don’t have to collect sales tax from that person.
Thus some Web sites, such as Barnes & Noble and Lands’ End, have collected Indiana sales taxes on items ordered by Indiana residents because those Internet businesses also have brick-and-mortar stores in Indiana.
Many other Internet merchants, including the largest, Amazon.com with $7 billion in annual sales, have not collected Indiana sales tax.
Some companies that have brick-and-mortar stores in most states have started what they call separate entities for online sales so online buyers won’t have to pay sales tax. But many of them also accept returns of online purchases at their brick-and-mortar stores, making it unclear if their claim to be separate entities would hold up in court.
Thus, deciding which Internet sites should have to charge sales tax has been hard for states. And traditional stores have not been happy that any Internet site gets away without charging sales tax. Such sites already have the advantage of cutting out the middle man. Add to that the convenience of shopping at home, free shipping at many sites, and a 7-percent price advantage in not charging sales tax, and it is no wonder that many people have chosen to buy more items on the Internet.
However, Robert Tanner of The Associated Press reported Wednesday that this fall 13 states, including Indiana and Kentucky, “will start encouraging – though not demanding – that online businesses collect sales taxes just as Main Street stores are required to do, and more states are considering joining the effort.”
A 1992 U.S. Supreme Court ruling forbids states from forcing businesses without physical presences in their states from collecting sales tax for those states. As Tanner reported, the court “noted the dizzying array of tax jurisdictions and widely varying definitions of taxable goods” as a reason for that ruling.
But the Streamlined Sales Tax Project, which has organized the states’ current effort to collect online taxes, said they have created software that will automatically calculate the different taxes for different states and for different items.
Thus one of the Supreme Court’s main arguments against online taxation is no longer valid. So the Streamlined Sales Tax Project hopes to persuade Congress to pass a new law to overcome the 1992 ruling.
We support their effort, as we think it will help level the playing field for all merchants and produce needed revenue for states.
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