In November 2001, Congress extended for two years a moratorium on internet access taxes. Those are the fees consumers pay to ISPs. But the legislation does not apply to the collection of sales and use taxes.
Contrary to popular belief, the internet is not a tax-free zone in the US. On-line transactions are meant to be taxed; the problem is that most customers don't know they're supposed to pay them and states lack an effective enforcement mechanism to collect them.
In 1992, the US Supreme Court ruled that states can't force retailers without a physical presence in the consumer's state to collect sales taxes. The court reasoned that the patchwork of roughly 7,500 taxing jurisdictions across the country is too complex and burdensome for on-line retailers. In order to collect sales taxes, the court ruled, states would need to first simplify the existing system. And this is now on the cards.
The Streamlined Sales Tax Agreement, signed on Tuesday, will now go to each state, which must enact legislation to bring their state and local tax laws into conformity with its provisions. It will become operable as soon as 10 states enact legislation.
The Agreement would establish uniform definitions for taxable goods and would require participating states and local governments to have only one statewide tax rate for each type of product, effective 2006.
State governments argue that implementation of the agreement would create a level playing field between "remote" sellers which are not obligated to collect and remit sales taxes and high street retailers, which must collect sales taxes. E-tailers argue that the playing field is already levelled by their need to charge delivery costs.
The current sales and use tax system in the US, with 7,500 state and local taxing jurisdictions across the nation, is antiquated, complex, and cumbersome to businesses. One of the problems with so many taxing jurisdictions is that they often have different laws or definitions of what is taxable. For example, a marshmallow might be defined as a food in one state, but as "candy" - and therefore not taxed - in the next.
That arrangement makes it very difficult for "remote" retailers, such as mail order companies and e-commerce companies, to calculate, collect, and remit sales taxes at varying rates to different state and local governments.
While a simplified system could save many businesses millions of dollars in efficiencies by removing the burden of complying with existing laws, rules and regulations in thousands of jurisdictions, the e-tailers are less enthusiastic.