Internet taxes have been fiercely debated since the first ban passed the U.S. Congress in 1998. That moratorium, set to expire November 2007, was extended for several more years at the eleventh hour. But those taxes had one thing in common: All were levied on Internet access or services. Internet sales taxes for goods purchased online were not on the Tax Man’s agenda … until now. Let’s back up a bit. Many groups eye revenues from Internet taxes: Budget-crunched state and local governments, groups speaking for shopping centers or brick-and-mortar retailers who claim tax-free online sellers get unfair competitive advantage … or that e-Commerce ruins storefront merchants who do pay taxes. Traditional telecom services joined the pro-Internet Taxation chorus, as the market demanded more voice-over-IP services, which are free of special regulatory fees that fall to landline customers. Again, that tax battle raged over Internet access or services.

Retailer Sales Tax Man Missing. Internet merchandise purchases stayed tax-free for two reasons:

(1) Too complicated to define and enforce tax collection in hundreds of sales tax jurisdictions online;

(2) As in the case of the 1998 tax moratorium renewed late in 2007, e-Commerce transactions got a tax pass when they were treated the same as mail-order purchases. A 1992 Supreme Court decision exempted mail-order resellers from collecting state and local taxes where the mail-order companies do not have a substantial brick-and-mortar presence. Sorting “presence” — in-state from out-of-state customers online — seemed unworkable. (See Number 1, above.) Enter the Tax Man from Albany.

In a New York Frame of Mind.
“New York must stop sanctioning sales tax avoidance practices and stop giving unfair pricing advantages to out-of-state retailers at the direct expense of the storefront taxpaying merchants who are the backbone of our Main Street economies across this state.”

That’s James Sherin, of The Retail Council of NY. He applauded a January 2008 proposal passed in New York State requiring online retailers to collect state and local taxes on any purchases made online through companies with a presence — any presence — in the Empire State.

The earlier sales tax exemption for online purchases was meant to be only a temporary breather while companies set up technologies to collect sales tax online. A Streamline Sales Tax Governing Board launched in 2000 helps states bring their sales tax rates and collection into the 21^st Century; 43 states are involved. Now, New York State says pay back time has come.

Amazon says, FerggitAboutIt. Amazon.com filed suit against the NYS Internet Sales Tax Collection law as violating commerce and equal protection clauses. Okay, always 2-to-20 sides to any issue. But this online sales tax opposition is different. It paints all online operators — great (Amazon, Google) and small (independent sites who post ads and links to other companies) — as “harmed” by NY law. A New Yorker site publisher who posts ads/links to Amazon (for PPC income) is presumed by NYS to have made Amazon a “solicitor” … requiring Amazon collect NY sales & use taxes or face penalties.

However, analysts like Don DePalma, author of “Business Without Borders” at a Boston globalization firm, say software companies have developed databases/ technology to track sales tax by ZIP code. (One I know of is AvaTax^TM from Avalara, which links to a merchant’s online shopping cart through a programming interface. It calculates from a buyer’s address whether the merchant should collect tax, then applies sales tax from any jurisdiction. Avalara estimates fees, which vary by online merchant size, as 5-to-35 cents per transaction. Note: I have no financial interest in this software company.)

Online sales tax collection may be a matter of when and how, not whether the Tax Man Cometh.