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The last tax-free Christmas online?

There can be a guilty little pleasure in buying that $350 iPod or $1,200 laptop online: avoiding the sales tax you'd have to pay at a local store.
/ Source: Forbes

There can be a guilty little pleasure in buying that $350 iPod or $1,200 laptop online: avoiding the sales tax you'd have to pay at a local store.

Technically, online purchasers owe sales tax to their home states and sometimes their cities or towns at combined rates averaging nearly 7.5 percent. (Except if they're from Delaware, Montana, New Hampshire or Oregon, which don't impose sales taxes.) But the Supreme Court has ruled a state can't constitutionally require a merchant to collect the tax unless the merchant has some physical connection to that state — say, a warehouse or a store there.

So big national "bricks and clicks" retailers, such as Best Buy, Circuit City, Wal-Mart Stores, and Target, collect taxes on most online sales. But only collects sales tax on shipments to Kansas, Kentucky, North Dakota and Washington.

Still, as the Supreme Court itself noted, there's nothing to stop Congress from authorizing states to require collection by out-of-state sellers. Nothing in the Constitution, that is. Politics are another matter.

Last year, Sen. Michael Enzi, R-Wyo., and Sen. Byron Dorgan, D-N.D., introduced similar bills that would require online and catalog merchants (or at least bigger ones) to collect sales taxes for any states that met standards set by the Streamlined Sales and Use Tax Agreement (SSUTA). The Enzi-Dorgan proposal stood no chance with taxophobic Republicans in control of the House.

Next year, with Democrats in charge? "The stars are lined up better," says Harley Duncan, executive director of the Federation of Tax Administrators, which represents state tax officials.

It's not just the change in partisan control that has raised the states' hopes. They also believe they can make a stronger case for new collection authority now that the SSUTA, which is designed to harmonize and simplify sales tax laws, is finally operating. As of Jan. 1, 15 states will be full participants in SSUTA, meaning they've adopted the required changes to their own laws. State officials spent years haggling over such issues as whether bakery bagels should be considered groceries, which few states tax, or prepared food, which is widely taxed. (The conclusion: If a bakery provides a utensil with your bagel or heats it for you, it counts as prepared food.)

So far, 1,000 merchants have signed up to voluntarily collect taxes for the SSUTA states, Duncan reports. As an incentive, participating merchants who use certain sales tax processing services get their tax collection costs subsidized and aren't held responsible for mistakes those services might make.

The states aren't alone in pushing this. The E-fairness Coalition, representing shopping mall operators and bricks-and-mortar retailers, is also backing the Enzi-Dorgan legislation.

Still, you needn't rush to buy online. This is hardly a done deal. The 4,700-member Direct Marketing Association is fighting any new authority for the states, arguing the SSUTA has barely reduced the tax collection burden presented by 7,500 different sales jurisdictions. Rather than adopting a single tax rate per state, as the DMA demanded, the SSUTA made only "cosmetic" changes, and the states are "cheating" on even those, DMA tax counsel George S. Isaacson says. "I would hope the Democratic leadership would say, 'We don't want to get tagged with a bad tax bill as the introduction to our leadership,'" he adds.

Nor is it clear how enthusiastic some soon-to-be powerful congressional Democrats will be about the legislation. Neither California nor New York is a SSUTA member. Last month, the New York State Department of Taxation and Finance issued a report questioning whether joining is worth the hassle. Among the problems: The SSUTA requires a state and its cities to use the same definition of what's taxable and allows each local taxing jurisdiction only one sales tax rate. That would interfere with New York City's special local sales taxes on beauty salons and saunas, its special exemption for interior decorators, and its two special tax rates on parking — one in Manhattan and the other for the outer boroughs.