Preparing for online sales and use tax collection.

• Author: Bartek, James
• Position: QUICK STUDY

A lready facing mounting financial pressures and stiff competition in a low consumer confidence environment, many retailers must now deal with the prospect of having to collect sales and use taxes for online purchases, as proposed federal legislation calls for an even playing field for traditional bricks-and-mortar retailers and their online counterparts.

The U.S. Supreme Court has maintained that the Commerce Clause requires a retailer to have a physical presence in a state before the state can compel an out-of-state retailer to collect and remit sales and use taxes.

In today's technology-driven world, however, many state tax authorities have argued they are losing money to which they are entitled and believe these constitutional limitations are arcane and need to he replaced with a more modern and, in their view, a more common sense approach.

With higher overhead costs associated with personnel and infrastructure investments, brick-and-mortar retailers want to equalize the tax burden, particularly as they compete increasingly with online retailers who may not be required to collect the tax.

At the same time, online retailers have used their political capital, urging states to retain the existing rules by arguing that overall, they enable job creation and economic growth.

Affect on Online Merchants

States that impose a sales tax also impose a complimentary use tax on buyers if the seller has not already collected the tax. The use tax helps ensure that out-of-state sellers do not have a competitive advantage over in-state sellers.

However, many consumers do not pay the use tax and therein lies the rub. Because of low compliance by consumers, and particularly with today's budgetary constraints, the states are looking to online retailers for tax collections.

Such a responsibility can be daunting to the online merchant. Sales and use tax compliance can be complex - with more than 7,000 jurisdictions imposing taxes with varying rates and nuances.

If federal legislation passes and collection becomes mandatory, many online companies will be saddled with new responsibilities, including determining rates, taxability of products and services, customer tax exemption status and rules for sourcing sales.

Furthermore, companies will have to prepare and file sales and use tax returns, manage audits and maintain supporting data and documentation. While the process may be burdensome for every retailer, small and medium-sized entrepreneurs attempting to...