Sinking Their Teeth into the Net Governments Look for Way to Get Sales Taxes from Electronic Commerce

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Byline: Lorilyn Rackl Daily Herald Staff Writer

These days shoppers can buy groceries over the Internet or plow through Christmas gift lists with nothing more than a phone and a catalog.

Doesn't sound like much of a nightmare, does it?

It does if you're the government and you're trying to figure out how to tax those sales - especially when it comes to shopping on the Internet.

The federal government is searching for a way to tax electronic commerce without smothering it with duplicative and discriminatory taxes.

State and local governments worry that if Congress doesn't make some changes, the Internet will become the Cayman Islands of the retail world, and governments will end up losing sales tax dollars as a result.

They say the same "loophole" that keeps billions of dollars of sales taxes on mail-ordered goods from reaching government coffers will only get bigger when applied to the burgeoning world of electronic commerce.

Unless a uniform, fair way of taxing Internet sales is created, governments that rely on sales tax, as well as businesses that have to compete with cyberspace counterparts, will lose out.

"Once the consumer realizes they can make purchases through the Internet that are tax-free, they won't do it on Main Street," said David Bennett, executive director of Northwest Municipal Conference, a consortium of suburbs from Cook, Lake and DuPage counties. "You'll see an erosion in the sales tax base."

Illinois estimates it loses $50 million a year on catalog sales tax because of the way the law is set up. That means local governments lose out too, because a portion of those taxes go to them.

For a business to charge its customers sales tax, the company must have a physical presence in that state.

If a Gurnee woman orders a dinnerware set from a Crate & Barrel catalog, she'll be charged Illinois' sales tax.

Crate & Barrel also has stores in New York, so a woman in Albany buying the same product would pay New York sales tax.

But in Kansas, where there are no Crate & Barrel stores, customers escape a sales tax.

The same logic applies to Internet sales.

A Schaumburg man doesn't pay tax on the books he buys via the Internet from because the company is based in Washington.

It's already complicated, but it gets worse.

Consider Utah Gov. Mike Leavitt's experience ordering groceries over the Internet during a recent trip to California.

"I got on my laptop. My server is in Utah. …