Internet sales taxes creeping closer to reality

Faced with crushing deficits, depressed tax revenues, and a grim outlook for 2009, states across the country are taking another hard look at taxing interstate sales completed on the web. Once a strict "no tax" zone, those walls are now on the verge of crumbling.

Following the lead of tax-hungry New York, 22 states and hundreds of retailers have joined a group called the Streamlined Sales Tax Governing Board. The goal of the group is to simplify the methods by which sales taxes are calculated, collected, and transmitted online by creating a set of tax rules that rolls the thousands of state, county, and city tax codes into a single, simplified code. And the SSTGB also wants to make those rules apply to all online purchasers, even those across state lines, not just buyers in the same state as the seller's offices.

The SSTGB already has some of the biggest retailers around in its pocket, including Wal-Mart, Borders, and J.C. Penney.

Of course, not everyone is thrilled about the prospect of the e-taxman. Amazon is famously suing New York for its requirement that the company collect sales taxes for all sales to New York, despite the fact that Amazon doesn't have a physical presence there. It is collecting those taxes, though, in the meantime, as the case works its way to court.

Overstock, however, is not collecting those taxes, having fired 3,400 of its New York-based affiliates in order to skirt the NY legislation. (The recently-enacted law claims that locally-based "affiliates," which collect a commission on referrals for sales of products sent on to a third-party retailer, constitute a physical nexus in the state and thus make the retailer responsible for tax collection.) Overstock is also suing New York over the law.

What happens now? More waiting and negotiating for the forseeable future. As Forrester analyst Sucharita Mulpuru notes, "It's a legal morass. In a best-case scenario, it's going to take a while to sort everything out."