By Larry Jones
July 14, 2003

As of July 1, 20 states had enacted legislation that will make it easy for out-of-state retailers (remote sellers) to collect state and local sales taxes when selling goods over the Internet, telephone and by using catalogue mail orders. And a few more states are expected to enact similar legislation before the end of the year. This aggressive action moves state and local governments one step closer to collecting billions of dollars that go uncollected each year due to a loophole in current law. While the Conference and other state and local groups were expecting approximately 10 states to clear legislation this year, no one expected 20 states to do so before the end of the summer.

Under current law, out-of-state merchants, unlike local retailers, can not be forced to collect state and local sales taxes. Supreme Court rulings in 1967 and 1992 (National Bellas Hess v. Illinois, 87 S. Ct. 1389 and Quill Corp. V. North Dakota, 112 S. Ct. 1904), prohibit state and local governments from requiring merchants that are not physically located in their state to collect their taxes. Under these rulings, which were handed down before the Internet and other modern technology were in place, the Supreme Court said it would be too burdensome and costly to require remote sellers to keep up with the tax rates and tax rules in thousands of different units of governments across the nation.

Consequently, billions of dollars go uncollected each year on remote sales. According to recent estimates, state and local governments will lose $26 billion this year, $45 billion by 2006, and $55 billion by 2011. At a time when state and local governments are facing the worst fiscal crisis since World War II, setting up a simple process to help them collect these taxes will provided some level of relief.

By enacting compliance legislation, 20 states have made the necessary changes to bring their sales and use taxes into compliance with standards outlined in the Streamlined Sales and Use Tax Interstate Agreement. The agreement serves as a blueprint to create a simplified sales and use tax collection system that removes the burden and cost from remote sellers and therefore provides justification for Congress to overturn the Bellas Hess and Quill decisions. It was developed and formally adopted last November by officials from 35 states after working with representatives from local government, the private sector and the general public. Since that time 4 new states have joined the agreement bringing the total number involved to 39. Also legislation is pending in California and several other states to allow them to join this effort.

This fall a governing board made up of representatives from states that have passed compliance legislation will meet to verify that changes adopted by states comply with simplification standards that are designed to make collecting state and local sales taxes simply, easy and more uniform across the nation. Those states that the governing board determine are in compliance will be authorized to participate in the simplified tax collection system.

States participating in the simplified tax collection system will employ modern technology and uniform tax simplification standards to entice out-of-state retailers to begin collecting their taxes. First, these retailers will be asked to collect taxes on a voluntary basis. But once it is demonstrated that using the technology and uniform standards will enable remote sellers to easily collect state and local taxes, Congress will be asked to enact legislation authorizing participating states to require remote sellers to collect these taxes.

In addition to the 20 states that have enacted compliance legislation, three more (Illinois, Florida and Montana) have passed compliance legislation in at least one of their legislative bodies, and six (Alabama, Alaska, Idaho, Maine, Missouri and Oregon) have introduced compliance legislation. States enacting compliance legislation are from all regions of our nation and vary in size from the smallest states like Wyoming and Vermont to larger states like Texas and Ohio. Overall, they have a combined population of 89,230,296 and comprise 31.7 percent of the United States population.