States Seek Internet Sales Tax ... and Lawsuits

In an effort to get sued, officials in 12 states are moving to impose taxes on out-of-state Internet retailers. This is meant to prompt Congress to pass a federal law, uniform standards for the revenue that states consider their due. They hope that retailers will challenge the taxation and create a sense of urgency in the federal government.

Alabama's deputy revenue chief, Joe Garrett, for example, told The Wall Street Journal he wants his state to get sued soon. The desired effect is action at a national level.

Looking for a Fight

"We're confident that some remote sellers will not comply and therefore it will lead to litigation," said Mr. Garrett. "We have been very open about what we're doing." Specifically, what Alabama is doing is enforcing an old law allowing taxation of out-of-state sellers.

The state is counting on some retailers failing to comply and challenging the enforcement action. This, Garrett believes, will make the federal government see that it must act on Internet taxation.

The push for out-of-state taxes is not just a quest for more revenue, but also an effort to protect local businesses, which do pay taxes. The problem, states say, is that people are purchasing from out-of-state sellers to the disadvantage of local business, which cannot compete.

Deb Peters, a Republican state senator in South Dakota has proposed a bill which would apply sales taxes to out-of-state purchases. It moved through the state Senate last week without opposition. "Our businesses simply can't survive without someone stepping up to make the marketplace fair and even again," Ms. Peters told reporters. "Since Congress has once again failed, it falls to us to fill that void."

How This Happened

The Supreme Court ruled in 1992, in Quill Corp. v. North Dakota, that states can apply sales taxes only to companies with a physical presence there. Since then, tax-free Internet sales have come to be and expanded dramatically. The Quill ruling, many say, is out-of-date and applies to the mail-order-catalog era of commerce.

Technically, buyers should pay tax on items purchased online, although this depends on the state. But few people are aware of this or report their purchases annually.

So the next time you order an item online, think of local businesses. If the states have it their way, we will certainly have to soon enough.

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