 
As online retailers carp over the taxman”™s new cyberspace stomping grounds in New York, the federal government is considering following suit by forcing retailers to collect sales taxes from customers for sales over the Internet.
Last month, Congress introduced a bill requiring retailers to impose a tax for purchases made online, save for sales by small businesses. If passed, the bill would allow states to recoup lost revenue while perhaps boosting business for brick-and-mortar retailers that bemoan business lost to dotcoms.
Last May, New York became the first state to enact a law requiring merchants advertising through state-based affiliates to charge an 8.75 percent tax for any purchases made online, with Amazon.com and Overstock.com promptly demanding a repeal of the law.
More recently, to close New York”™s budget deficit Gov. David M. Paterson sought to tax music downloads. Vermont likewise is proposing a “digital goods” tax on audio or visual downloads.
The Retail Council of New York State has supported New York”™s efforts to collect state and local sales taxes on items sold over the Internet, saying online merchants are operating at an unfair advantage.
In mid-April, researchers at the University of Tennessee estimated that online sales taxes could help states generate more than $50 billion in revenue over the next three years, revenue sorely needed with sales tax collections down sharply.
To date in the recession, that has been less the case in New York where sales-and-use tax collections were off just 1.9 percent for the first nine months of the fiscal year ending this June, according to the Office of Tax Policy Analysis, not including sales taxes charged at the local level. While that was $205 million below their levels in fiscal 2008, it easily bested the 5.4 percent drop in neighboring Connecticut.
In 1998, Congress passed the Internet Tax Freedom Act, which banned federal taxes on Internet access, as well as taxes deemed discriminatory such as levies based on e-mail volume or bandwidth usage. The law has been extended three times, most recently as the Internet Tax Nondiscrimination Act of 2004. New Hampshire is alone in the Northeast among 10 states nationally to charge such a tax on the state level.
Those laws do not address the taxation of products purchased online, however, which are subject to taxes in the same way mail catalog purchases are.
Like other states, New York has long sought to recoup revenue lost to tax havens, whether cyberspace, duty-free shops or cyberspace, imposing a use tax on items purchased elsewhere that are consumed within the state borders. The use tax essentially is collected on the honor system, however, prompting New York and the federal government to consider collecting online sales taxes directly from vendors.
During the high-tech recession of the early part of the decade, New York and several other states sued Walmart and other retailers in a bid to force them to collect and remit sales taxes on items sold online.
In 2001, Connecticut announced a bounty arrangement in which it would share a quarter of any taxes recovered as a result of an investigation using taxpayer data from another state.
In the 1992 decision on Quill Corp. v. the State of North Dakota, the U.S. Supreme Court ruled that a mail-order company with no physical presence in a state did not have to collect use taxes for transactions, despite customers in that state using its software to make purchases.
As a result of that decision, more than 20 states created the Streamlined Sales Tax Project (SSTP) in an effort to simplify the levy and collection of sales and use taxes across jurisdictions.
New York has not formally joined the consortium; in a 100-page study published in 2006, the Office of Tax Policy Analysis warned the initiative could significantly increase the complexity for retailers unless the New York state sales tax code was completely overhauled.
Still, in simplified form the initiative promises to even the playing field for brick and mortar retailers in most areas who must charge tax on items sold tax free online. In the Northeast, New Jersey is a member as are Vermont and Rhode Island. The Connecticut Senate is currently considering a bill that would require the state to formally track STTP”™s progress.
