Internet creates tough web for tax collectors to untangle

Monday, March 16, 1998 | 9:53 a.m.

CARSON CITY -- The growing practice of buying over the Internet is causing headaches for those who collect taxes for the state.

Nevada may be losing millions of dollars in sales tax revenue on items sold from web pages by out-of-state companies to local residents.

It's impossible to tell how much, but Michael Pitlock, director of the state Department of Taxation, says the "potential loss could be very large."

This problem, which is getting increased attention, comes at a time when collections from the Nevada sales taxes are lagging.

Sales tax receipts produce the biggest revenue for the state -- 38.4 percent. The financial experts predicted it would grow 8.5 percent this year to yield $503.3 million. But in the first six months, the increase is only 4 percent.

Part of the reason for the slumping collections could be the increased business over the Internet, but at this point it is probably minimal. The next governor and the 1999 Legislature won't find any huge cash surplus for construction or pork barrel projects.

Nevada isn't the only state hit by the Internet dilemma. Many others also depend heavily on sales tax to finance government.

A national study reported Americans bought $2.6 billion worth of goods over the Internet in 1997. That's about 1 percent of all retail sales. Researchers are predicting the sales will grow to $327 billion by the year 2002.

Gov. Bob Miller is one member of an eight-governor panel appointed by the National Governors Association to produce a report on the Internet tax system.

In Nevada, school districts and local governments also place heavy reliance on sales tax collections to support schools, police, fire and other services.

It's impossible to police these sales over the Internet or from catalog stores. For instance, a person who buys a piece of jewelry from an out-of-state operation, probably won't be charged sales tax.

There's a law in Nevada that a use tax must be imposed on goods bought outside the state and shipped in. But it's impossible to enforce that law when it comes to people, says Pitlock. "We don't have an audit program for individuals."

But the auditors can nab businesses that don't pay this use tax when they exam the company's books.

And there's no way to know the address of a business on the Internet unless it includes its address. And that creates a tax haven for the company and the customer.

Pitlock said firms based in other states have an advantage when they sell to Nevadans without including the sales tax. In Clark and Washoe counties, it's a 7 percent advantage since that's the amount of the tax. "When you don't charge the extra percent on the top, that makes a difference," Pitlock said.

"They (out-of-state businesses) don't want to give up that competitive edge," he said.

And these businesses feel it would place an administrative burden on them to collect the tax. There's a multitude of laws and different rates on the tax across the country.

Pitlock says the problem is nationwide and must be dealt with by Congress.