Internet Sales Tax – What’s Fair To Small Business?

States are losing tax dollars to internet sales but some solutions to the problem would have small businesses filing sales tax reports to multiple states. Where’s the middle ground?

States throughout the country are struggling with budget deficits and many are jealously eyeing what they see as lost sales tax revenues due to Internet sales. Currently there are 45 states with sales and use taxes, and multiple city and local taxing jurisdictions within many of the states. The total number or taxing jurisdictions (more than 7,500) and conflicting rules (some items or services are taxable in some locations, but not others), led the Supreme Court to rule in 1992, that the states would have to first simplify tax regulations before they could require out-of-state businesses to collect their taxes.

Now, a group of states is trying to do that (simplify sales taxes) so they can move to force online sellers to collect out-of-state sales taxes. In November of 2002, members of the National Governors Association (NGA) approved a model interstate agreement to streamline the nation’s sales tax system. The model 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.

But most small businesses, particularly microenterprises with limited staff, limited finances and limited technical capabilities, believe that having to collect taxes and remit taxes for states other than their own will prove a burden – in some cases, an insurmountable one. Instead of filing one state tax return quarterly, having to track sales by state and possibly by item, and file the appropriate paper work with the appropriate frequency in all states would be a time consuming and /or expensive nightmare. The cost of compliance would cut into profits and possibly put some out of business. Lower profits would mean lower income taxes paid to their own state. And lower profits would mean less money to spend with other small businesses in their communities – and more small businesses going under and falling off the tax rolls completely.

So what’s the answer? States can’t afford to lose increasing revenues to untaxable internet sales. And small businesses can’t afford the burden of even the currently proposed simplified state sales tax system. Where’s the middle ground?

We asked our readers to send us their thoughts about the state sales tax issue. As you might expect, we got comments that ranged from tales of woe to outrage that anyone should have to pay tax. But what the majority of small businesses want is a simple, hassle-free way of conducting business.

Personally, I think states should consider a single, nationwide sales tax that is collectible by the company that makes the sale, and payable to the state in which that business is based. I think few small businesses would object to collecting and remitting tax in this way. In fact, online retailers and catalogers located in states such as NY where one is required to collect and remit tax at the rate an item is delivered to, being able to charge and remit a single tax rate would be a welcome change.

But, those are my thoughts. We’ve collected a number of comments from other small businesses around the country. Some came from my email, some from notes posted on our message board, and some from E-Tailer’s Digest, an excellent discussion list run by George Matyjewicz. 

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