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Online sales tax collection could see backlashPolicy change unlikely to kill Web sales in Pa., analyst predicts

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Pennsylvania is venturing onto a part of the retail superhighway that few other states have tread: forcing online retailers to collect sales taxes if they have affiliates, associates or physical presence in the state.

Other states advise caution, saying there could be backlash from online retailers, but ultimately the change in policy will create a fairer business environment. Pennsylvania seems better positioned to avoid problems from forcing online collection because it has a simpler tax structure than other states, retail groups said.

The Pennsylvania Revenue Department issued a guidance Dec. 1, formally putting remote retailers — catalog and online stores — on notice that they need to collect the state's 6 percent sales tax on all in-state sales and remit to the state if they have physical presence, or nexus.

It's estimated the state will lose $380 million this year to the non-collection of online sales taxes, Revenue Secretary Dan Meuser said. Remote retailers have been exempt from collecting sales tax since 1992 when a U.S. Supreme Court decision set down the nexus standards and said only Congress could give states the right to collect taxes from out-of-state vendors.

Today, online retailers have until Feb. 1 to determine if they fall under Pennsylvania's definitions of nexus and begin collecting, Meuser said. The state will initiate enforcement actions ranging from reminders to audits, liens and finally sending each case to the attorney general to prosecute companies that fail to collect, he said.

"We'll do our best to collect taxes that are due," Meuser said.

Collection from remote retailers has been the law for decades, but hasn't been enforced, he said. However, the immense retail growth on the Internet in the last 15 years has changed the environment, leaving brick-and-mortar stores at a disadvantage and prompting the Corbett administration to address the issue. Particularly since the state is dealing with revenue shortfalls and budget cuts.

Illinois — similar in size to Pennsylvania with 12.8 million people — went through the same thing over the last three years. Pennsylvania could see some backlash from large online retailers, said Susan Hofer, a spokeswoman for the Illinois Department of Revenue.

In 2009, 68 of the top 100 online retailers already were collecting sales taxes, she said. The next year, Illinois added a law that required online retailers with in-state affiliates to register to collect taxes. Many of those companies, including Seattle-based Amazon.com Inc. canceled those affiliate contracts, Hofer said.

That caused a backlash among the local companies affiliated with the large online retailers because they were losing business, she said. However, the action drew praise from brick-and-mortar stores, particularly in Chicago where state and local taxes add up to a 10 percent disadvantage to online retailers, she said.

The net result could be promising for Illinois, Hofer said. The state estimates it loses between $150 million and $170 million in taxes due to e-commerce, she said.

"We expect to see an uptick in sales taxes over this leveling of the field," she said.

Dozens of companies already have registered to collect sales tax because of the laws, and a use tax worksheet on Illinois's tax return drew in $11 million in 2010, Hofer said.

"We don't expect to be at 100 percent (of companies collecting,)" she said. "There are small businesses that will never collect the tax. And under (pending) federal law, many of those will not have to."

Some large online retailers, including Amazon, favor the Marketplace Fairness Act, a bill in Congress that would require remote retailers with more than $500,000 in sales to collect taxes and gives states the power to enforce their tax laws.

"Amazon strongly supports enactment of the Enzi-Durbin-Alexander bill and will work with Congress, retailers and the states to get this bipartisan legislation passed," Paul Misener, Amazon vice president for global public policy, said in a statement Nov. 9 when the bill was introduced in Congress.

Misener later testified before the House Judiciary Committee that exemptions could produce a secondary unfair advantage for small out-of-state online retailers unless the exemptions are kept at a very low threshold.

"Yet no one should want these online sellers to take advantage of a newly created un-level playing field over small Main Street businesses, and no one should want government to pick business model winners and losers this way," Misener said.

Amazon has repeatedly refused to answer questions about its business in Pennsylvania. When asked whether the company would continue its affiliate network or make changes to its five distribution warehouses — operated under the subsidiary Amazon.com.dedc LLC — spokesman Ty Rogers simply said Amazon is working with Congress, retailers and states to pass federal legislation and forwarded Misener's congressional testimony.

Thirty-eight of the top 50 Internet retailers are licensed to collect taxes in Pennsylvania, according to the Revenue Department. That does not include Amazon — the largest online retailer according to Internet Retailer's Top 500 — which has two warehouses in Cumberland County and one in York County, according to the department.

The Direct Marketing Association, a Washington, D.C.-based trade group representing remote retailers, said in May that forcing online retailers to begin collecting now puts them at a disadvantage because they have to figure out the thousands of tax rates for every municipality and state. That's expensive, time consuming and hurts online businesses, most of which are small businesses, the group said.

Pennsylvania might have an edge over other states on this issue because it doesn't have local sales taxes, except in Pittsburgh and Philadelphia. The state sales tax is 6 percent, but 1 percent is added in Allegheny County and
2 percent in Philadelphia.

In Amazon's home state of Washington, every county and city has its own sales taxes, which complicates collection, said Jan Teague, president of the Washington Retail Association.

In 2008, Washington became a signatory to the streamlined sales tax pact, which is a state-based initiative to standardize definitions and tax codes across the country. When that happened, it became more difficult for companies to deal with taxes because companies now had to collect based on where the customer was, not where the seller was, Teague said.

Similar problems will occur with online sales tax collection; but if a state has a simpler tax structure like Pennsylvania, it will make it easier for companies to adopt, she said. In Washington's case, the state government helped businesses make the transitions by offering assistance and promoting the use of software to calculate taxes and improve businesses, she said.

"The success of what your state is trying to do is going to depend on your department of revenue and how well they respond to these questions about what's taxable and not," she said.

Even if there are problems, tax collection shouldn't hurt online sales, said Britt Beemer, chairman and
founder of South Carolina-based America's Research Group Ltd. The firm interviews more than 10,000 consumers a week for its clients, two-thirds of whom are retailers looking for input on products, markets and sales trends.

There likely will be some negativity around online sales including taxes, but that won't kill sales, he said. Consumers are always shifting their purchasing around from place to place and shopping for deals, but states with simple, straightforward taxes aren't affected as much as those with complex taxes, he said. Tack on added charges and the scenario changes.

"When consumers have to pay sales taxes, it doesn't affect them as much unless they have to pay shipping and handling charges on top of it," Beemer said.

Keeping it simple is part of Pennsylvania's enforcement efforts, Meuser said last week. The state offered the two-month grace period on enforcement, there will be no size exemptions and Gov. Tom Corbett is not proposing new laws, he said.

"The governor is very conscious of having a business-friendly brand for Pennsylvania," he said.

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