Web merchants duck sales-tax crackdown - for now

Web merchants, relax. Experts say there's no need to worry that a coveted sales tax loop-hole will close any-time soon, despite a New York Times report that a deal to end the $1.2 billion exemption is "imminent."

The loop hole in question? A Supreme Court ruling that exempts mail-order companies, selling either from paper catalogs, by telephone or from Web sites, from being required to collect sales taxes for products delivered across state lines.

Say, for instance, that you buy a book from Seattle-based Amazon.com. If you live in Washington state, Amazon tacks on Washington's sales tax. But if you live in California - oh, happy day! No sales tax is assessed.

Of course, some states don't like that, and there's a long history of litigation on the issue. But the Supreme Court weighed in with a decision saying that one state can't force a company operating in another state to collect its sales taxes.

Consumers are supposed to pay the taxes. But few do. The New York Times reported in a front page article Thursday that this Christmas may be the last for the exemption. Specifically, the paper said a deal was "imminent" between officials of the "biggest states" and a trade group for the mail order industry to end the $1.2 billion exemption.

The paper said an agreement was to be announced Friday.

But officials of the trade group - the New York-based Direct Marketing Association - said that no announcement was planned for Friday.

"There is no agreement, even on a draft," the association president, Robert Wientzen, told MSNBC.

He added, however, that the association is working on a document - which addresses only sales through paper catalogs - that would be a model for new state legislation, allowing companies to voluntarily collect the taxes.

He said the association has been working on the proposal for five years and it will be at least a year or two before any state implements it.

The current draft circulating within the association outlines a basic trade-off. A state would agree to adopt an association-backed definition of what it means for a company to actually operate in a state, something referred to as "nexus." In return for accepting a definition that is supposed to end many state-company tax battles, an out-of-state mail order company would be offered the opportunity to agree to collect sales taxes on goods sold to consumers in the state.

There would also be provisions to ease the administrative burden of collecting taxes.

Wientzen said he believes it is possible that a state or two could adopt such legislation in a year or two, and that some catalog companies could agree to go along. He said an association committee may vote on the proposal relatively soon, but not by Friday.

The current draft of the proposal deals does not address Web sales, Wientzen said.

And, as far as Web merchants are concerned, that may be a good thing.

To be sure, publicly many Web merchants profess to be unconcerned about the tax talk.

"We don't believe that the sales tax is a driver of sales," an Amazon.com spokeswoman said.

But not everyone agrees. For instance, in recent focus group discussions with online shoppers market researcher Find/SVP has found that many are increasingly frustrated that Web merchants don't offer cut-rate prices, said vice president Thomas Miller.

"There's this perception that the Internet ought to be a discount channel" because it is so automated and efficient for the merchant, he said.

But increasingly consumers are deciding that shipping costs make the Web a more expensive place to shop. New sales taxes would only make it worse, Miller said.

Furthermore, it might be difficult for many small Web merchants to build and maintain computer systems that allow them to assess state and local taxes nationwide, and also forward the tax payments to governments.

There are 77,000 different sales tax rates around the country and on average 40 changes in these rates each month, according to the Sales Tax Institute, a Chicago company that runs sales-tax seminars.

Furthermore, six states - Alabama, Louisiana, Arizona, Colorado, Alaska and Minnesota - don't even act as a state-wide collection agency, forcing companies to deal with county and city authorities as well.

"For large mail-order companies, like Land's End, who have been used to collecting taxes in some states, the roll out might not be that bad," said Diane L. Yetter, president of the Sales Tax Institute.

"But for mail-order companies that are smaller, to require them to purchase software and to file returns ... they're going to go out of business."

Bob Sullivan contributed to this story.