States Seek Out Software Firms To Help Collect Net Sales Taxes

INVESTOR'S BUSINESS DAILY - Link to article 

An Internet sales tax is in the works - a move that could be a bust for online retailers but a boom for some software companies.

A coalition of states is looking for software makers to help it draft a plan for collecting Internet sales taxes. The effort, known as the Streamlined Sales Tax Project, is reviewing proposals from several software companies that make tax-collection software.

The group plans to make its selections in the next few months and have a plan in place to collect sales taxes before the end of the year.

"We expect to have an agreement with all of the states involved by Oct. 1, and then we can start collecting," said Bruce Johnson, a Utah tax commissioner and co-chairman of one of the Streamline Sales Tax committee groups.

Current laws require retailers to collect sales tax only in states where they have a store or a warehouse.

For many e-tailers, that means not collecting taxes on most of their sales - since their customers come from all different states.

States Want The Money

State governments are lobbying Congress for change. They want a law to require online retailers to collect sales tax regardless of where their customers live.

Analysts say a federal law is likely, but it will take time. They don't expect one before 2008.

States are a salivating to cash in on the growth of e-commerce. Online retail sales in the U.S. are expected to jump 22% this year to $172 billion, says the National Retail Federation.

States are missing out on $15.5 billion a year in uncollected sales tax, analysts say.

"That's a lot of money left on the table, and states need the money," said Christopher Baum, an analyst for the research firm Gartner.

For now, retailers are sheltered legally from having to collect sales taxes in states where they don't operate. That stems from a 1992 Supreme Court ruling. It exempted a catalog retailer from collecting sales taxes in a state where it had no physical operations.

But many companies believe it's only a matter of time before Congress requires the collection of taxes from all online sales.

Would-Be Tax Collectors

Some entrepreneurs are banking on it. Take Jonathan Barsade, who started a software company called Exactor 18 months ago.

Exactor looks to become part of states' sales tax collection project.

The federal government can no longer ignore the growth of the Internet and states' need for fresh revenue, says Barsade, Exactor's chief executive.

"There is no way the government is going to allow the Internet to remain a tax-free environment," he said. "This is a gap that is waiting to be filled."

Collecting Net sales taxes would level the playing field for all product sellers, says Gartner's Baum. "It's not right that if you go to a bicycle shop down the street you have to pay a sales tax, but if you buy it online you don't," he said.

Not everyone agrees. EBay, (EBAY) the world's largest online auctioneer, opposes the change.

Still, other online merchants see the move as inevitable. Some have already begun to collect sales tax on all online sales.

They would rather comply now than face legal action later, says Charles Collins, vice president of government affairs for Taxware, a tax-collection software company.

"There are a lot of online retailers that came forward about a year and half ago and agreed to collect the tax because of all the progress the states had made," he said.

Some software firms are already cashing in on the shift.

Avalara started selling its tax-collection software a year ago.

The small company, one of the ones under review by the Streamlined Sales Tax Project, already has 325 customers and partners using the software. Users include large and small retailers.

Companies are voluntarily signing up to collect sales tax to avoid future legal disputes with states, says Rory Rawlings, founder of Avalara.

"The biggest issue with small businesses is liability," he said. "Most companies don't like to get audited."

Some states have pursued companies for not collecting sales tax.

Two years ago, the state of California began auditing bookseller Barnes & Noble (BKS) for not collecting sales tax from residents who purchased books on its Web site.

State officials contended Barnes & Noble should collect sales tax because it operates several stores in the state. Barnes says it's exempt because Barnesandnoble.com operates separately from its offline stores. The case is pending.

In most states, residents who do not pay a sales tax when they make a purchase online must pay a "use tax," the equivalent of a sales tax.

The use tax is supposed to be included in annual income tax statement. But most online shoppers don't bother.

States rarely pursue the issue with taxpayers, but it has happened, says Johnson.

"You are seeing a mixture of approaches by state governments," he said. "They just want to get paid."