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States, business watch for effects of Illinois tax

By Ben Klayman

DETROIT (Reuters) - Now that Illinois has passed a law to collect sales taxes on items bought over the Internet, other states and big retailers are watching for the impact on other parts of the country.

"There seems to be a flurry of these bills all at once. One reason is there's a lot of changeover in legislatures around the country," said Rebecca Madigan, executive director of the Performance Marketing Association, a trade group representing online merchants and affiliates.

"The big-box guys are really putting a lot of money behind this and stirring things up through a lot of fear, uncertainty and doubt," she said.

"Big-box" refers to giant national chains that sell out of large stores and say sales tax laws give online retailers an unfair advantage.

The U.S. Supreme Court has ruled a company only has to collect sales taxes where it has a physical presence, saying that states' divergent tax systems are too complicated to require businesses to comply with them all.

That allows Amazon.com Inc and other on-line retailers to skirt collecting taxes in states where they do not have headquarters or a corporate presence. In turn, shoppers pay less on-line than at stores in many states.

For more than a decade, the Streamlined Sales Tax Governing Board has sought to change this by having all states agree to simplify their tax administration and make their tax codes uniform. According to the board, made up mostly of state legislators, 24 states have passed legislation conforming to the agreement and nine states are considering bills.

Now, though, some states are taking the more direct tack of requiring retailers to collect the taxes.

Last week, Illinois Governor Pat Quinn signed the "Mainstreet Fairness Act" to target those online retailers like Amazon that have affiliates in the state. He said the law will create fairer competition and help Illinois, a state hit hard by the 2007-2009 economic recession, build up revenue.

Illinois estimates it loses at least $153 million in sales tax revenue annually due to retailers not collecting the tax.

Texas is considering taxing online sales and California, which already passed legislation that was vetoed, is considering another bill.

"If Illinois and California and Texas move forward on this, then you will see a number of states take similar action," said Jason Brewer, a spokesman for the Retail Industry Leaders Association, which represents such large brick-and-mortar retailers as Home Depot Inc.

"You can't continue to operate with an unlevel playing field given the way online sales are growing," he said.

In 2010, total "e-commerce sales" were $165.4 billion, 14.8 percent higher than 2009, according to government data. Still, they only accounted for 4.2 percent of all retail sales.

The sales tax revenues likely will not make up for states' huge budget gaps caused by the housing market downturn, financial crisis and recession -- they are projecting shortfalls totaling more than $100 billion next fiscal year.

California, for example, says if its sales tax legislation were to pass, state and local revenue would increase $152 million this year and $317 million next year. The state's budget deficit through the middle of 2012 is projected at more than $25 billion, which means its Internet sales tax revenues would represent less than 2 percent of its yawning gap.

But Internet retailers say they could cause states real fiscal pain by hitting income tax revenues. Income taxes are second only to federal aid as a source of state revenue, according to the National Conference of State Legislatures. Amazon and Overstock.com Inc have threatened to cut off affiliates who work with them in states with Internet tax laws.

"For us, there's really no side effect, but for the states, they lose the income tax," Overstock President Jonathan Johnson told Reuters.

Wal-Mart Stores Inc last week invited Illinois online businesses to join its affiliate network.

California's Board of Equalization, which runs the state's tax program, said the state's bill "would have an adverse impact" on employment and its personal income tax. It could not forecast how much, though, the state stands to lose.

For Rob Babek, a partner at independent accounting and advisory firm Marcum LLP in Los Angeles, asking Amazon to collect taxes would create an administrative nightmare because the company has "thousands and thousands of transactions everyday all over the country."

"The only fair way to handle this would be to simply impose a federal sales tax on all Internet sales and then the federal government would distribute such taxes to each state," he said.

(Writing by Lisa Lambert; Additional reporting by Karen Pierog in Chicago and Lisa Lambert in Washington; Editing by Kenneth Barry)

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