States Seek Sales Tax Overhaul Aimed at Internet

by Andy Sullivan

At least 30 states will attempt to simplify their sales tax codes next year with an eye toward eventually capturing revenue from Internet sales, a key state legislator says.

State and local governments must streamline their laws to convince an unsympathetic U.S. Congress that Internet-based businesses should not enjoy special protection, Illinois state Sen. Steven Rauschenberger, co-chair of a task force that is drafting model legislation, said Friday.

"If we don't act quickly and show Congress we're serious, we'll have a real problem,'' Rauschenberger told an audience of about 50 state legislators and aides gathered for a conference here.

At issue are the $488.7 billion in goods and services that Forrester Research estimates were sold on the Internet this year.

States are prohibited from collecting taxes from businesses outside their jurisdiction by a 1992 Supreme Court ruling on catalog sales, and by a three-year moratorium on new Internet taxes passed by Congress that is set to expire in October 2001.

Proponents of protecting the Internet from taxation say sales taxes would quash nascent Web retailers.

State and local officials, who rely on sales taxes for up to one-half of their funds, point to lost tax revenue and the unfair advantage the exemption gives dot coms over traditional bricks-and-mortar businesses. Forty-five states rely on sales taxes for revenues.

The issue is expected to come to a head in the next few years as on-line sales are expected to grow exponentially. Moody's Investor Service estimates that states could miss out on $10 billion in sales-tax revenues by 2003 if the exemption is continued.

A Simple Plan

Businesses say the maze of state and local regulations that govern sales taxes would be difficult for them to sort out if they were required to pay taxes on their Internet sales.

The model legislation drafted by Rauschenberger's task force would simplify tax codes and enable certified third parties to calculate and collect the taxes automatically, in a manner similar to credit-card companies.

Registration, filing and audit processes would be streamlined, Rauschenberger said, and tax jurisdiction would be determined by the address of the recipient.

The legislative task force will meet next week to formally approve the plan, which is expected to be introduced into at least 30 state assemblies next year.

The streamlined plan is the best bet for states to avoid a scenario in which they are forced to raise property and income taxes to make up for sales-tax losses, Rauschenberger said.

If sales-tax reform is not enacted, he said, "at some point in our lifetimes the sales tax just won't work anymore."