Online sales tax amnesty to encourage online tax collection

Contrary to popular belief, the internet is not a tax-free zone in the US. Online 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 because tax rates and rules vary from state to state.

Internet businesses currently rely on a 1992 Supreme Court decision that prevents states from collecting sales taxes from a business unless the company has a physical presence or “nexus” in that state. Because most online merchants maintain physical stores in few places, they exempt customers from most states from paying taxes.

This creates an obvious discrepancy between online and off-line retailers, with the latter arguing that it is unfair for them to have to collect taxes while their online competitors do not, making it harder to compete with a dot.com.

It also means that states are missing out on the tax revenues that could be generated from booming internet sales. Many have lobbied Congress to legislate against the tax exemption offered by the Supreme Court ruling.

For the past five years around 40 states have been working together on the Streamlined Sales Tax Project, which aims to simplify the nation’s sales tax laws by establishing one uniform system to administer and collect sales taxes, including those for online sales.

According to the E-Commerce Times, 11 states, including Iowa, Michegan, Nebraska and West Virginia, are now ready to launch their online sales tax collection program. Seven more are waiting for their tax codes to be amended to be fully compliant with the Project.

Once up and running this voluntary scheme will allow online merchants to collect taxes according to the rates in place where the customer lives.

The scheme offers free tax collection and remittance software and also offers an amnesty of one year to online businesses that have not been making appropriate collections in the past. This may be attractive to online merchants, some of whom have already found themselves in court over online taxes.

In May, the internet arm of bookseller Borders was found liable for sales taxes on products that were ordered by customers resident in California. An appeals court dismissed the company's argument that its internet division had no physical presence in the state after examining the connection between the internet division and the off-line stores.