Online shopping is losing a tax-free perk Big retailers that also own stores are collecting sales taxes for states that levy them. Web-based firms may be next. Online shopping may be losing its tax-free advantage

Posted: March 26, 2003

Now spreading like a virus across the World Wide Web: sales tax.

Last month, some of the country's biggest retailers started charging state sales taxes more widely at their shopping Web sites, accelerating a movement that could make local tax part of every online purchase from a U.S. company.

Before February, and did not add sales tax when selling merchandise to buyers in Pennsylvania and New Jersey. Now, for taxable items, they add the same 6 percent you would pay in a store.

Before February, if you bought a Michael Graves cheese grater at, you paid local sales tax, but if you ordered the same utensil from Target's section on, it was tax-free. Since Feb. 2, it has been taxed either way.

Target Corp. made the change "because of a realignment of the relationship" between Target Corp. and its Internet subsidiary, spokeswoman Cathy Wright said.

None of the above merchants, who realigned their tax collection policies simultaneously at the start of February, has acknowledged whether it was part of an agreement that eight national retailers struck with a group of around 40 states - including Pennsylvania and New Jersey - that has been working to recoup millions in uncollected revenue.

That agreement was signed at the end of January and specified that participating retailers begin charging sales tax of Internet shoppers in all states where they have stores on or around Feb. 1, according to John Coalson, an attorney from Alston & Bird in Atlanta representing the companies.

Neither Coalson nor the states would identify the participating retailers. But in Pennsylvania and New Jersey, among other states, the newly collected levies are trickling in.

"It's not really significant yet," said State Rep. David J. Steil (R., Bucks), who this spring plans to introduce legislation to simplify Pennsylvania sales tax to conform with a proposed national system. "The idea is, ultimately, to be able to collect [tax] on all remote sales."

Technically, when you buy from an out-of-state Internet or catalog merchant, you are supposed to pay any uncollected sales tax voluntarily on your state income-tax return. Every April, millions of taxpayers forget to do so.

The Pennsylvania Department of Revenue said it collected about $5 million a year from taxpayers who pay voluntarily - a fraction of the estimated $100 million-plus lost in sales taxes on out-of-state purchases each year, according to the department. New Jersey gives similar numbers.

Their problem is the same as every state's: They cannot legally force an out-of-state company to collect their tax. Only companies with a physical presence, or "nexus," in a state can be made to collect sales tax from that state's residents. That rule comes straight from the United States Constitution, which says, "No tax or duty shall be laid on articles exported from any state."

A 1992 Supreme Court decision in the case of Quill Corp. v. North Dakota upheld the law. There is also a national moratorium on "discriminatory" Internet taxes that may or may not apply to states' existing sales taxes. It expires in November.

As a first step, states are cracking down on Internet businesses that have been skirting tax-collection responsibility by claiming to have no local presence. Target, Wal-Mart Stores Inc., and Toys R Us Inc. have stores in almost every state. But each established its Internet operation as a separate company and was collecting sales tax consistently only from residents of states where the Internet unit had a presence. For Wal-Mart, that was nine states.

In February, under the deal struck between eight retailers and a group of state revenue officials, participating companies agreed to collect tax from shoppers in every state where they have stores, in exchange for immunity from liability for uncollected back taxes. Coalson said all the companies were multistate store retailers that had had separate Internet operations, and he said others would soon join in.

The agreement keeps the names of the companies confidential.

Why? "There are three states that have said they won't enter the agreement and have promised to go aggressively after companies to try to assert liability," Coalson explained. "I don't want to make it any easier for them to find my clients."

But getting brick-and-mortar store chains, which do only a small portion of their business online and have frequently argued for taxing Internet commerce, is the easy part. The real goal of the states is bigger cheese: Getting Congress to legalize interstate sales tax.

Then, Internet-only sellers such as could be forced to collect taxes for the states.

"Until . . . Congress does its thing, we can only depend on nexus, and if that doesn't exist, we can't force anyone to do it," said Steil, the Pennsylvania legislator.

Today Amazon collects sales tax from residents of just two states: Washington, home of its headquarters, and North Dakota, where it has a telephone center. Its Delaware warehouse conveniently sits in a state that has no sales tax.

"We collect sales tax where we are legally required to do so," spokesman Bill Curry said.

He said there were more than 7,500 local taxing jurisdictions nationwide, with varying rates even within single zip codes and quirky definitions of what is taxable (for example, disposable plastic plates are taxed in New Jersey, but paper plates are not.) Getting sales tax correct for everyone in the country places an "undue burden" on the company's business, he said, citing the 1992 Supreme Court decision.

But that ruling, which upheld the ban on interstate sales tax, left an opening that may allow Congress to change the law: Congress may reconsider the ban if "undue burdens" in collecting out-of-state sales taxes were eased.

In hopes of making a case to Congress, last November a group of state revenue officials, in a plan called the Streamlined Sales Tax Project, said they had developed a simplified system using just one sales tax rate per state.

They said new software would make it easy for an Internet merchant to add the correct tax to every purchase.

Now states must pass laws getting their local tax codes to comply with the national standard. Pennsylvania and New Jersey lawmakers are preparing such legislation. Steil said he would introduce his bill this spring, and it might be ready for a vote by fall.

As more states adopt simplified taxes, more companies will play along. Some four dozen online retailers agreed in November to start charging out-of-state sales tax if the simplified system is adopted by enough states, according to Frank Shafroth, director of state and federal relations for the National Governors Association. That could happen this year, he said.

By fall, the states also hope to have enough steam rolling to persuade Congress to legalize interstate sales tax. Each state then would separately decide whether it wants to compel or others to collect the levies.

"My best guess is that we're at least a year away from that, if - and it's a big if - Pennsylvania decides to actually do that," Steil said.

Contact staff writer Don Steinberg at 215-854-4981 or

Taxes or No Taxes?

You still never know whether a Web site will charge sales tax; each has its own policy. Retailers that do most of their business through traditional stores have become more diligent in adding sales tax to online purchases.

Online-only merchants Adds sales tax only for buyers in states where it has a physical presence: Washington and North Dakota. (It has a warehouse in Delaware, where there is no sales tax.) Adds no sales tax to transactions between eBay users. Adds sales tax only in Utah, location of its headquarters.

Brick-and-mortar retailers Adds sales tax only where independently owned has a physical presence: New York, New Jersey, Tennessee and Nevada. Adds applicable sales tax in all states except Alaska, Hawaii and Vermont, where it has no stores. Previously added sales tax in nine states, now does so in every state that has a sales tax.

Catalog merchants Adds sales tax in 12 states where Lands' End has stores or offices, including New Jersey. Adds sales tax in 32 states where it has stores or offices, including Pennsylvania and New Jersey.

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