The Internet has no borders. That’s why I’m livid that any Connecticut law maker would think that there’s $520 million of tax revenues that can be easily tapped if suddenly states could collect a sales tax on goods and services sold over the Internet. The current system that Internet companies use, is that if you have a physical presence in the state, you collect sales taxes. That makes much sense from the perspective that if you have a physical presence you are already filing with the state for a variety of services. But most companies that operate on the Internet are not multi-state operations. They are small companies that operate from a single location, some maybe not even in the US.

The Democrats in the state legislature propose that they can collect a tax by joining a multi state tax compact. From the Courant:

The Democrats propose a plan to join a multistate tax alliance that would require Connecticut to abandon the sales tax exemption on clothing costing less than $50. Under terms of the Streamlined Sales Tax Compact, Connecticut could collect taxes on Internet sales, but sales tax exemptions would have to go.

The loss of the exemption would force consumers to pay $284 million in sales taxes on clothing over the next two years.

“There are a variety of troubling elements in the Democratic spending plan, but this may be the worst part,” Rell said. “Eliminating the sales tax exemption on clothing will hit each and every family in Connecticut.”

Democrats say that by joining the multistate compact, Connecticut would bring in an estimated $520 million from Internet and mail-order sales each year.

But a quick trip to the web site about internet sales taxes,  reveals that congress would have to amend a federal ban on the collection of Internet sales taxes. So, the proposal at the very least would result in an immediate loss of the clothing exemption currently in place, and no new additional revenues.

The Dems proposal is extremely anti small business. As an Internet small business entrepreneur, I have both operational and philosophical biases against local governments instituting taxes on the sales of goods and services occurring on the Internet. And, I would point out that mail order companies, who operate without ecommerce have been doing so for years without facing such routine assaults on operational issues.

I should also mention that it’s not the collection of the tax, and differing rates that presents the operational problem.  It’s the filing and payment of those taxes that turns a simple accounting process into a 50 state, plus countless county and municipal revenue collector paper chases. In Ohio, for example, there are differing rates at the county level. So if a customer who lives in Franklin county orders a product from your Internet site, but has it shipped to a Cuyahoga county address, which rate would apply? I just happened to pick the most recent tax code dilemma that I’ve faced recently as a develop of web sites. There are many more complicated versions.

The other aspect of the proposed Connecticut budget is the loss of the $50 dollar exemption on clothing. I can’t say that I, personally, have issue with that. But I do recognize that there are plenty of people who have children who end up buying much more clothing than you would think. And those young families, who already have stretched finances will be paying more sales taxes under this proposal, well, let’s just call it the diaper tax, because that’s where the legislators are going to get that revenue jump. The D&G set are already paying sales taxes.

source: Courant, Rell, Democrats spar over taxes on clothing, Internet sales, Associated Press, April 14, 2007