Deal to close mail-order tax loophole said to be imminent

David Cay Johnston

Thursday, Nov. 6, 1997 | 10:58 a.m.

The coming holiday season could be the last for a cherished loophole that lets mail-order shoppers avoid paying sales taxes on purchases from out-of-state companies.

Under an agreement negotiated by officials of the biggest states and a trade group for the mail-order industry, many merchants would begin collecting sales taxes on such transactions. The agreement, which is expected to be announced Friday, would cost consumers about $1.2 billion a year, representatives of both sides in the talks said Wednesday.

Legally, such purchases are subject to the same tax as a customer's transactions at the local department store. But tax collectors have had no way to compel out-of-state merchants to collect the tax on their behalf, and catalog retailers and other direct marketers have generally shunned the task.

But big mail-order sellers like Lands' End and L.L. Bean have sought such an agreement, and the talks are being closely watched by other companies that sell through the mail, by telephone or cable television, or over the Internet, including Dell Computer, Microwarehouse, Gateway 2000 and American Express.

The companies assert that they will lose little in sales by ending a tax break their customers have long enjoyed, according to Robert Levering, a vice president of the Direct Marketing Association, which represents the mail-order companies in the negotiations.

Levering said he expected the agreement to be in effect in the biggest states in about a year.

Though a business could preserve a price advantage by continuing to refuse to collect sales taxes, such a refusal would be an invitation to tax collectors in various states to audit its sales.

Still, retailing experts say some categories of businesses are likely to opt out of the voluntary agreement, including companies that sell low-cost goods or products with thin profit margins, such as toys and certain home-computing items.

And mail-order shoppers would continue to be able to avoid paying sales tax by having goods delivered to someone in a third state. Under that circumstance, there would be no sales tax due.

Still, the agreement -- made possible by software that makes it easier for mail-order companies to calculate the hundreds of different sales taxes imposed by states, cities and special districts -- would help solve nettlesome problems vexing the states and the companies alike.

State and local governments, which impose sales taxes of 2 percent to about 9 percent, complain that they are losing sales taxes on much of the more than $215 billion of annual mail-order sales -- and that the growth of sales on the Internet poses an added threat to their tax base.

For their part, the mail-order companies are weary from years of litigation needed to maintain the exemption from collecting sales taxes, which the U.S. Supreme Court has preserved for businesses that do not have any physical presence in a state.

Under existing law, a company that, for example, sells to New York customers only by phone or over the Internet is not obligated to collect New York sales tax from those customers, even though the customers are legally obligated to remit the tax to the state.

Except for cars and other items that must be registered, there is no practical way to collect the tax from the buyer, so the revenue is lost to state and local governments.