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DMA: Internet Tax No Windfall for States

E-tailers fighting an effort to collect Internet sales taxes issued a study claiming states would glean little money if such a system is created.

WASHINGTON — Catalog and e-commerce companies fighting an effort to collect Internet sales taxes issued a study Thursday that claims revenue-hungry states would glean little money if such a system is created.

This story first appeared in the March 14, 2003 issue of WWD.  Subscribe Today.

The study, released by the Direct Marketing Association, is the latest salvo in the Internet sales tax debate that is soon to be reinvigorated on Capitol Hill.

“A lot of pure Internet retailers will have problems staying afloat,” if they’re required to collect taxes, said H. Robert Wientzen, president and chief executive of the DMA. “There is no pot of gold for the states in creating new burdens for remote retailers.”

The issue pits direct marketers against leading bricks-and-mortar retailers who favor e-commerce sales taxes, and some, like Wal-Mart, have already voluntarily started collecting e-taxes. The stores argue that cyber retailers should also have to shoulder the cost of tax collection, which, for large chains, can run into the millions of dollars annually.

Thirty-five states are leading proponents in the pro-sales tax camp and they point to growing state and municipal deficits as cause for Congress to allow them to form compacts to tax Internet sales. Now, remote sellers are only required to collect sales taxes if they have a physical presence where goods are purchased. In the case of Wal-Mart, the chain initially formed a separate company to avoid this sales-tax requirement.

The DMA’s Wientzen discounted voluntary e-commerce tax collections, arguing that retailers like Wal-Mart are simply realizing savings by using a “clicks-and-bricks” strategy of using stores for Internet inventory and e-sales returns.

According to the DMA-commissioned study, state Internet tax collection forecasts of huge windfalls were made before the dot-com bust three years ago.

The DMA study said in 2001, states lost out to only $1.9 billion in uncollected Internet sales taxes, compared with $13 billion forecast in a pre-dot-com-bust study conducted by the University of Tennessee. The university study has been widely used as the benchmark for measuring potential tax revenues.

For their part, traditional retailers were unconvinced by the DMA study.

“The amount of revenue generated is irrelevant,” Maureen Riehl, a vice president of state affairs for the National Retail Federation, said in a statement. “The issue for retailers is the unfair price advantage enjoyed by merchants who don’t have to collect sales tax.”

Congress will have to give its approval before states can form compacts and collect Internet sales taxes. Two years ago, the issue was debated in committee in the House and Senate. But lawmakers were concerned about the difficulty in collecting taxes for 7,500 tax jurisdictions with varying rules as to what gets taxed and said states would have to narrow their taxing differences first.

In November, a state committee issued a plan providing for two taxing jurisdictions per state, but unlimited jurisdictions at the local level.

The tax issue is expected to resurface on Capitol Hill this fall. The debate, as before, will be folded into discussions about an unrelated moratorium on Internet use and access taxes. Tax-collection proponents want the two tax and moratorium issues discussed in tandem so the Internet tax issue doesn’t get lost.

Like earlier congressional wrangling on the tax issue, Federated Department Stores is caught between both camps. Federated is opposing Internet sales tax collection until states develop an even more simplified tax version.

Frank Julian, operating vice president and tax counsel with Federated, who attended the unveiling of the DMA study at a news conference, said the current state tax simplification plan could lead to doubling the number of taxing jurisdictions. He said Federated annually collects $1 billion in sales tax a year for 34 states at a cost of “tens of millions of dollars out of our pocket.”

Julian welcomed the DMA study and said, “If Congress is going to consider legislation that would require remote sellers to collect sales tax, it should at least be armed with accurate data.”