By Catherine Hubbard, CCH Washington Staff Writer

Are Internet and mail order sales taxes on the way? It's beginning to look like it will happen sooner rather than later.

In light of the recession and declining revenues, states should start taxing cross-border Internet and catalogue sales, according to testimony at a recent forum sponsored by the Brookings Institution. States should work together to build cross-border sales taxes into their tax bases and ensure that businesses can administer the tax, said Douglas E. Howard, director of the Michigan Family Independence Agency.

"There's at least some hope that that's realistic," Howard said at the October 15, 2002, forum in Washington, D.C. However, he said, states should not be expected to coordinate their tax rates. "I'd be hard-pressed to see any support for anything like that."

Oklahoma State Senator Angela Z. Monson, president of the National Conference of State Legislatures, said the conference is "very close to finalizing" an agreement under its Sales Tax Simplification Project to help states collect sales tax across state borders. However, she said, some states are concerned that creating uniformity will adversely affect their sales tax revenue.

Currently, the federal Internet Tax Freedom Act generally prohibits taxes on Internet access, but it preserves all state and local taxing authority that is otherwise permissible under current law. So in theory, governments are allowed to tax purchases made over the Internet as long as the tax is not discriminatory--that it is the same on the Internet as it would be in any other location or format.

However, a 1992 Supreme Court ruling states that businesses that do not have a physical nexus or connection to a state cannot be compelled to collect sales taxes for that state. Moreover, businesses with a nexus in a particular state can only impose the sales tax on buyers/residents of that particular state. However, all states with a sales tax also have a use tax that is owed by the buyer when sales tax is not collected on a taxable sale. The buyer is required by law to self-asses this tax.

The Sales Tax Simplification Project has been working for more than three years to develop a multistate agreement that would resolve the numerous compliance issues and allow states to collect these taxes across borders and on the Internet.

With more than $10 billion debt in some states, state governments are in "a real quandary," said Neal R. Peirce, chairman of the Citistates Group. States must balance their budgets, yet they have a deteriorating tax base, he noted.

Calling the tax base "outdated," Peirce said it is "ideal for the manufacturing economy of the '50s and '60s," but "not very appropriate for a high technology, international, service-oriented economy." The current system taxes goods, but exempts most services, he said, adding that "services from accounting to real estate to information technology are where the action is of today's economy."

Creating a tax on sales made over the Internet would create "a level playing field in commerce," said Donald J. Boyd, director of the fiscal studies program at the Rockefeller Institute, New York.

Alice M. Rivlin, senior fellow of economic studies at Brookings, noted that the "sale of goods is not going up nearly as fast as the sale of services." To compensate, states tend to shift their revenue burden to the income tax, Rivlin said, adding that the approach "simply exacerbates the cyclicality problem." States should simplify the sales tax so that they can tax the remote sales by national catalog firms and Internet sellers, Rivlin said.

Related items:

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Congress Receives Formal Internet Tax Report from ACEC

Experts Advocate Simpler Method of Taxing Electronic Commerce

Cumbersome Internet Sales Taxes Could Impose Disproportionate Burden

Senate Passes Internet Tax Freedom Bill