States eye Internet sales for more taxes

NEW YORK — Shopping online can be a way to find bargains while steering clear of crowds — and sales taxes.

But those tax breaks are starting to erode. With the recession pummeling states' budgets, their governments increasingly want to fill the gaps by collecting taxes on Internet sales, which are growing even as the economy shudders.

And that is sparking conflict with companies that do business online only and have enjoyed being able to offer sales-tax-free shopping.

One of the most aggressive states, New York, is being sued by Seattle-based Amazon.com over a new requirement that online companies must collect taxes on shipments to New York residents, even if the companies are located elsewhere.

The amount of money at stake nationwide is unclear; online sales were expected to make up about 8 percent of all retail sales in 2008 and total $204 billion, according to Forrester Research. This is up from $175 billion in 2007. Based on that 2008 figure, Forrester analyst Sucharita Mulpuru says that if Web retailers had to collect taxes on all sales to consumers, it could generate an estimated $3 billion in new revenue for governments.

Collecting online sales taxes is not as simple as it might sound. A nationwide Internet business faces thousands of tax-collecting jurisdictions — states, counties and cities — and tangled rules about how various products are taxed. And a 1992 U.S. Supreme Court ruling said that states can't force businesses to collect sales taxes unless the businesses have operations in that state. The court also said Congress could lift the ban, which remains in place — for now.

As a result, generally only businesses with a "physical presence" in a state — such as a store or office building — collect sales tax on products sent to buyers in the same state. For instance, a Californian buying something from Barnes & Noble's Web site pays sales tax because the bookseller has stores in the Golden State. Buying the same thing directly from Amazon would not ring up sales tax.

In hopes of unraveling the complex tax rules — and bringing states more money — 22 states and many brick-and-mortar retailers support the efforts of a group called the Streamlined Sales Tax Governing Board. The group is getting states to simplify and make uniform their numerous tax rates and rules, in exchange for a crack at taxing online sales.

New Jersey, Michigan and North Carolina are among the largest of the 19 states that have adjusted their tax laws to fully comply with the group's streamlined setup.

Washington was the only state to join in 2008, but more states may soon follow.

Companies that handle Web sales only have organized as well. NetChoice, whose members include eBay and online discount retailer Overstock.com, supports the states' tax-simplification efforts, but its executive director, Steve DelBianco, says online retailers should have to collect taxes only in states where they have a physical presence.

But what if the meaning of "physical presence" is changed? New York essentially did that in April when its budget included a provision requiring online retailers to collect taxes on purchases made by New Yorkers.

The new rule requires retailers to collect sales tax if they solicit business in New York by paying anyone within the state for leading customers to them. Since some Web-site operators within New York are compensated for posting ads that link to sites like Amazon, the online retailers would have to collect taxes.

Matt Anderson, spokesman for the New York state Division of the Budget, said the state expects to reap $23 million during the current fiscal year, which ends March 31, from newly collected online sales taxes.

Anderson said the state wants "to level the playing field and end the "unfair competitive advantage" Web-only companies have over brick-and-mortar stores that can't avoid collecting sales taxes.

Amazon complies, and collects sales taxes on shipments to New York. However, Amazon is still fighting the rule. It sued New York in April, alleging its provision is unconstitutional.

Amazon also said it is being specifically targeted by the law. The case is pending.

Amazon declined further comment.

Salt Lake City-based Overstock is also suing New York over the law.

Unlike Amazon, Overstock is not collecting sales tax in New York, because it ended agreements with about 3,400 affiliates in the state that were being paid for directing traffic to Overstock.com.