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Will Internet Shopping Be Tax-Free Forever?

One of the perks for customers shopping online is the absence of sales tax for out-of-state purchases. Since online merchants would have to pay separate taxes in every other state in the country, a process that would be both complex and difficult to enforce, the Supreme Court decided in 1992 that such merchants would be exempt from paying out-of-state sales tax. However, following the growth of online commerce starting around 1999, many states have been lobbying for a way to collect such taxes. Dubbed the "Streamlined Sales Tax Project," this initiative, currently backed by 41 states, would set up more uniform tax rates and provide merchants with a reasonably easy method for paying taxes to other states. If those conditions were put in place, adherents of the Streamlined Sales Tax Project believe that the Supreme Court's decision of 1992 would be rendered invalid.

In September, the new tax project was introduced in Congress as a bipartisan bill, and if signed into law, it would allow all participating states to begin collecting taxes from out-of-state vendors. For online merchants, that would require collecting the appropriate taxes from the appropriate customers. This won't happen in time to affect the upcoming holiday season, some expect that it could happen by the 2004 holiday season. Others are more skeptical that the bill will pass at all.

Though the future of an Internet sales tax is unclear, a few of the larger retailers are beginning to take it upon themselves to voluntarily make changes to their sales-tax systems. Reuters reported that a few of the larger online retailers, such as Wal-Mart, Target, and Lowes, have already begun to collect taxes for other states. In September, the state of Illinois sued a group of out-of-state online stores with brick-and-mortar presences in Illinois for taxes that the state felt should have been collected from its residents. Such suits fly in direct opposition to the 1992 Supreme Court decision, and many other states would presumably sympathize, especially if they're facing budget deficits in an age in which online commerce is blossoming and largely untaxed.

As the groundwork for a new tax system is being formed, online merchants need to make their own decisions with regard to out-of-state sales tax, and to keep in touch with the laws affecting their own states.

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