The e-commerce industry is booming, and everyone wants a piece of the pie. But when it comes to collecting sales tax on items bought over the Internet, certain states are being starved.
Due to a tax loophole, many consumers avoid paying sales tax to their state, and the General Accounting Office estimated in 2003 that 45 states and the District
of Columbia lose more than $13 billion of revenue annually,
a number that is steadily rising. A University of Tennessee study estimates the number may increase to more than $45.2 billion annually
by 2006.
\The problem with an Internet sales tax stems from the sheer number of taxing jurisdictions,"" UW-Madison MBA candidate Daniel Court said. ""Retail sales tax works because it is based on the store's physical location. If Internet sales were taxed, these online sellers would have to keep track of sales taxes in approximately 7,500 taxing jurisdictions.""
When a company does not have a physical presence in a state, such as a store, a warehouse or a manufacturing facility, customers are not obliged to pay sales tax when buying a product via the Interne or through the mail. Yet, the customer is required to pay the tax when they file their taxes.
""Technically, people should be reporting sales and use tax on their tax forms,"" Court said. ""It's just that nobody does.""
Court, along with fellow UW-Madison MBA candidate Patrick Morrell and three other business school students, recently competed in the PricewaterhouseCoopers xTAX competition, a national competition where teams of college accounting students compete to find the best solution to real-world tax policy problems. Court and his team chose to present a strategy on how to implement an Internet sales tax.
The Wisconsin team matched wits with more than 165 other teams from across the country in Washington, D.C., in late January and emerged victorious. This is the second time in three years the team from UW-Madison has placed first in the competition.
However, implementing a strategy to tax Internet sales is much more difficult beyond the setting of a collegiate competition. Legislators have tossed around various proposals at the federal level, yet none have gained enough momentum to be passed into law.
""Due to the large number of stakeholders and conflicts of interest, passage of a tax bill like this is difficult,"" Morrell said.
Currently, some states are working individually on a plan to collect these sales taxes. In announcing his February budget for the next biennium, Gov. Jim Doyle presented a proposal that would simplify the collection of Internet sales taxes, as well as the collection taxes on mail-order items,. Doyle's budget predicts Wisconsin will lose $5.7 million in the next two years.
A similar proposal for Wisconsin to join the Streamlined Sales Tax Project failed last legislative session. The Streamlined Sales Tax project is a multi-state effort to simplify and modernize sales- and use-tax collection and administration. This is meant to make it easier for merchants in one state to collect the taxes they would not otherwise get when selling to a customer in another state, and to alleviate the mounting tension between locally based stores and Internet-based stores.
""Bricks-and-mortar stores feel that they are at a competitive disadvantage with pure Internet sellers due to most Internet sales being tax-free,"" Court said.
Despite the demand for an Internet sales tax, it is not likely one will be implemented on the federal level anytime soon. In 2001, President Bush renewed the moratorium on Internet taxation, and the issue has yet to appear this year before Congress.
""The states need Congress to allow them to collect sales taxes from out-of-state sellers who make sales to customers in state,"" Morrell said. ""Realistically, passage faces an uphill battle.""
Although there is little legislative progress toward an Internet sales tax, Morrell noted that as internet sales continue to grow changes will need to be made in the future, in order to curb the states' massive losses of revenue.
