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Consumer Reports

States take step toward Internet taxes | (UPI) -- State governments searching for badly needed revenue have taken another step toward removing a longtime roadblock to the taxation of Internet sales but a tax reformer warned Wednesday their plan is doomed to failure.

State tax officials, legislators and other delegates from 31 states adopted a model agreement Wednesday in Chicago that would bring uniformity to sales taxes assessed across the nation, simplifying the thousands of different rates and definitions.

"This new agreement creates a more efficient system for both businesses and state and local governments," said Kentucky Gov. Paul E. Patton, chairman of the National Governor's Association.

The agreement was the latest product of the Streamlined Sales Tax Project that was created two years ago to address the legal problems of states trying to collect sales taxes on items purchased outside their boundaries on the Internet.

Revenue-strapped state governments are losing up to $14 billion a year on untaxed Internet transactions, according to Frank Shafroth, director of State-Federal Relations for the NGA in Washington.

The agreement adopted by the Streamlined Sales Tax Implementing States would become operational when 10 states have enacted the legislation, which could take place as early as June of next year, according to some experts.

Under the model pact, uniform definitions would be established for taxable goods and each state or local government would agree on one tax rate for each product before 2006. Compliance by states and businesses would be voluntary.

"This is a 21st century system that will dramatically improve the morass that currently exists," said Utah Gov. Michael Leavitt, who was one of the leaders in pushing for what's being called the first overhaul of the nation's sales tax policy in 40 years.

About 7,500 state and local jurisdictions utilize the sales and use tax, which is complex and cumbersome for many businesses. But it would be even more difficult for e-commerce companies trying to collect the taxes for 45 states with sales taxes.

In 1992, the U.S. Supreme Court said states must first simplify their sales tax laws in order to require out-of-state retailers to collect and remit the taxes. States don't have that authority without an act of Congress or a ruling from the Supreme Court.

Congress has imposed a moratorium on Internet access fees until November of next year but it does not apply collection of sales and uses taxes.

Some of the strongest backers of Internet sales taxes are the owners and operators of so-called "brick and mortar stores" who must collect sales taxes locally while their e-commerce competition escapes that chore.

"The guy from a furniture store says we've got customers who come in and sit down in our couches, our easy chairs, and they pick a color they like and then they go home and get on the Internet and they order exactly that furniture," said Shafroth.

Grover Norquist, president of the Americans for Tax Reform, doesn't buy that "level playing field" argument though. He said the Internet buyer may not have to pay sales taxes as he would in a local store, but he has to pay shipping and transportation costs.

And he asks rhetorically what an Internet company gets in government service for collecting sales taxes for a state where it's not located.

"They don't educate their kids, they don't provide their fire protection, they don't provide police protection," said Norquist. "Yes, it makes sense for the local store to pay taxes to the state because they get some services from the state."

Norquist also warned of invasion of privacy because computer purchases would be identified and tracked for tax purposes. He also charged that a system of one state collecting taxes in another state would lend itself to corruption and unlimited abuse.

"It's a tax cartel that they are trying to set up and they will fail," he said. "They have only tried this for the past 40 years and failed in the past."

The states are expected to urge Congress to implement the program nationwide once its approved by at least 10 states, but it's uncertain what kind of reception it would receive next year in the Republican-controlled Congress.

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