3 Reasons Why Congress Shouldn’t Mandate Collection of Internet Sales Tax in Every State

Washington, DC – Today, congressional supporters of the multi-state Simplified Sales Tax Project (SSTP) introduced the Simplified Sales and Use Tax Act, legislation that will force e-commerce retailers and catalogues to collect sales tax in every state.  The NetChoice Coalition recently finished a study identifying the current problems with the SSTP, entitled “Sales Tax Simplification: Not So Fast — It’s Not That Simple.”

 

Supporters of the SSTP suggest that this new revenue will help states cut their bloated deficits.  Here are three of the key reason why rushing to tax all Internet sales will not solve budget deficits and will create huge cost burdens on e-commerce companies.  The full report can be found at www.netchoice.org .

 

 

1. Taxing Internet sales will NOT solve state budgetary woes. 

 

Advocates of a sales tax collection mandate have relied upon a flawed University of Tennessee study whose potential revenue estimates from Internet tax collection are ten times too high.  Why?  The Tennessee professors showed the effects of “Internet exuberance” by forecasting e-commerce growth of 40% per year, when actual growth has been a more modest 12%.   Generally, the DMA forecasts of taxes lost to Internet commerce are just one-tenth as high as the Tennessee forecasts.  To put this into perspective, consider this.  The total projected revenue from taxing e-commerce in all states is a mere $4 Billion, while the projected deficit for California alone is $38 Billion. 

 

 

2. SSTP Is Not That Simple, Yet

The SSTP is not close to achieving the level of simplicity that the Supreme Court requires of any effort to collect remote e-commerce sales.  While the SSTP aims to whittle the 7500 current taxing jurisdictions down to one per state, they are running into some road blocks.  Kansas recently rejected the destination-based sourcing aspect of the SSTP agreement and Texas has created a special tax zone just to protect Dell Computers.

Even tax officials have expressed doubt as to the simplicity and workability of the SSTP.  In a research study where twenty-seven state tax commissioners were interviewed, doubts were raised by these administrators that the SSTP would ever be successful.  One tax official was quoted as saying, “We’ll never get every one of those states to standardize, never mind the numerous local tax authorities. We’ll never get the uniformity necessary to make it work.” 

 

3. Even After Simplification, The Cost of Collection Will Be a Large Burden for e-Commerce Companies.

SSTP advocates promise to offer free tax software to assist with computing sales tax and filing with thousands of jurisdictions. While it’s true that a shopping cart website will benefit from a state-certified tax calculation tool, the real complexity and costs of retail information systems are in handling what goes on behind the Web site. That is, the back-office staff and systems to process partial orders, exchanges, returns, and credits. It’s therefore likely that the state-supported tax software won’t agree with the retailers’ back end systems when figuring the taxes due to each jurisdiction. Some retailers may make the investments to modify their back-end systems to obtain SSTP certification, but they’re still going to have to file and remit to each jurisdiction. Thus far, the SSTP debate has been over-simplified in describing the costs of collection and compliance. That’s going to change as remote retailers –especially small businesses — get a closer look at the SSTP legislation and requirements.

The SSTP has authorized a study of the collection burden for e-commerce companies, but has yet to release the Request for Proposals.  Yet, without this information, the states are rushing to sneak this legislation through Congress.