Online buyers beware

NEW YORK — Shopping online can be a way to find bargains while steering clear of crowds — and sales taxes.

But those tax breaks are starting to erode. With the recession pummeling states' budgets, their governments increasingly want to fill the gaps by collecting taxes on Internet sales, which are growing even as the economy shudders.

And that is sparking conflict with companies that do business online only and have enjoyed being able to offer sales-tax free shopping.

The amount of money at stake nationwide is unclear; online sales were expected to make up about 8 percent of all retail sales in 2008 and total $204 billion, according to Forrester Research.

Based on that figure, Forrester analyst Sucharita Mulpuru said her rough estimate is that if Web retailers had to collect taxes on all sales to consumers, it could generate $3 billion in new revenue for governments.

The Center on Budget and Policy Priorities estimates that the states' budget gaps in the current fiscal year will total $89 billion.

Collecting online sales taxes is not as simple as it might sound. A nationwide Internet business faces thousands of tax-collecting jurisdictions — states, counties and cities — and tangled rules about how various products are taxed.

And a 1992 U.S. Supreme Court ruling said that states can't force businesses to collect sales taxes unless the businesses have operations in that state. The court also said Congress could lift the ban, which remains in place — for now. As a result, generally only businesses with a "physical presence" in a state, such as a store or office building, collect sales tax on products sent to buyers in the same state.

That doesn't mean products purchased online from out-of-state companies are necessarily tax-free. Consumers usually are supposed to self-report taxes on these items. This is called a use tax, but not surprisingly, it tends to go unreported.

In hopes of unraveling the complex tax rules — and bringing states more money — 22 states and many brick-and-mortar retailers support the efforts of a group called the Streamlined Sales Tax Governing Board. The group is getting states to simplify and make uniform their numerous tax rates and rules, in exchange for a crack at taxing online sales.

In response, more than 1,100 retailers have registered with the streamlining group and are collecting sales taxes on items shipped to states that are part of the agreement, even if they are not legally obligated to.

New Jersey, Michigan and North Carolina are among the largest of the 19 states that have adjusted their tax laws to fully comply with the group's streamlined setup. Washington was the only state to join in 2008, but three more states are close to becoming full members of the group. And Scott Peterson, the group's executive director, expects another seven states, including Texas, Florida and Illinois, to introduce legislation in January that would make them eligible to join.

Besides various states and retailers such as Wal-Mart Stores Inc., Borders Group Inc. and J.C. Penney Co., the National Retail Federation, the industry's biggest trade group, also supports the Streamlined Sales Tax group.

Companies that handle Web sales only have organized as well. NetChoice, whose members include eBay Inc. and online discount retailer Overstock.com Inc., supports the states' tax simplification efforts, but its executive director, Steve DelBianco, says online retailers should have to collect taxes only in states where they have a physical presence.

But what if the meaning of "physical presence" is changed? New York essentially did that in April when its budget included a provision requiring online retailers like Amazon to collect taxes on purchases made by New Yorkers. The new rule requires retailers to collect sales tax if they solicit business in New York by paying anyone within the state for leading customers to them.