States seek way to cash in on growing buy-by-mail business. Firms oppose bill that would require them to collect sales taxes
The cost of sending away for L.L. Bean hunting shoes, Lands' End sport clothes, and many other popular mail-order items will go up if the nation's governors have their way. Currently, consumers don't have to pay state sales tax on many purchases made through catalog orders and toll-free telephone calls. But the National Governors' Association wants Congress to let states collect tax on such transactions - for an estimated $2 billion revenue windfall.Skip to next paragraph
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Direct marketers say this move would be unfair. They cite costs of 15 cents on the dollar to collect sales taxes through the mails while stores can collect at the register. They add that the responsibility placed on the consumer of figuring the tax devalues their most precious commodity, convenience.
``The proposed legislation places a relatively heavy burden on mail-order retailers,'' according to L.L. Bean vice-president William T. End.
The House of Representatives is considering three pieces of legislation that seek to overturn a 1967 Supreme Court ruling against imposing state sales tax-collection responsibilities on mail-order firms that have no physical presence in or significant relationship with the state.
The pending bills cover retailers who engage in regular sales solicitation in a state. Mail-order businesses that have less than $12.5 million in nationwide gross receipts or less than $500,000 sales in a particular state would be exempt from collecting the taxes. Taxes would be turned over quarterly to the individual states. Local taxes could be collected as well if there is a uniform statewide rate.
Mail-order retailers that have stores in most, if not all, states - like J.C. Penny and Sears - already collect sales taxes.
``This is a Main Street, America, issue,'' says Gov. George Sinner of North Dakota. He says storefront retailers in his state are handicapped by a 5 percent cost advantage afforded mail-order firms which do not have to collect the tax.
``The inequity is pretty obvious,'' the governor adds. He also maintains that his state will lose $10 to $18 million in unpaid taxes over the next two years.
James Martin of the Governors Association echoes the sentiment of Governor Sinner. He says small state retailers are losing their shirts because of a ``market that has radically changed.''
Mr. Martin says conservative estimates put mail-order growth at 9 percent annually. Such firms currently hold 15 percent of the market, with projections to hit 20 percent by 1990.
``With $2 billion involved to invest and draw interest, we think [mail-order] firms can [still] make money,'' says Martin. He refers to the fact that retailers deposit sales-tax money and draw interest on it for a time before turning it over to the state.
The Direct Marketing Association in Washington, D.C., which is the mail-order industry's trade association, acknowledges that mail order is a growing industry, but disputes Governor Sinner's 5 percent cost differential.
``We pay that much in shipping and handling,'' says Robert Levering at the association. ``With average purchases of $55, it comes out to about the same.''
Collecting taxes through the mail is harder than collecting taxes in person, says Robert Edmund, president of a catalog distributor of optical and scientific equipment.
Consumers ``must determine which items are taxable, what the correct rate is, and then do the computation, a math problem involving decimals and taxes to really test our customers' motivation to buy,'' Mr. Edmund says.
Direct marketers predict a further profit slash when costs escalate from having to absorb customer errors in figuring sales tax.
Direct marketers say they will challenge the constitutionality of the legislation in court. In the 1967 Supreme Court decision, National Bellas Hess v. Illinois Department of Revenue, the court held that solicitation and subsequent delivery of goods through interstate channels did not provide the state with a sufficient ``nexus,'' or relationship, with the company to require tax collection.
The court found that the Illinois requirement violated both the commerce clause and the due process clause of the Constitution.
University of Texas law Prof. Lucas A. Powe Jr. says 20 years of ``clean Supreme Court precedent'' supports the unlikelihood of states' establishing a sufficient relationship with the companies to make the legislation the law of the land.
He says that although Bellas Hess did a huge volume of business in Illinois, the court found the state had no jurisdiction. Professor Powe told a House Judiciary subcommittee, ``The Constitution requires a vote against bills that run directly counter to the court's holdings.''
This absence of a legal relationship to states gives mail-order firms a competitive edge, says Nathaniel E. Standing, tax legislation and field operations director for the J.C. Penney Company.
Mr. Standing says that collection of taxes sparks many customer inquiries. Mr. Standing asserts that customer knowledge that merchandise can be purchased without taxation fosters an atmosphere of tax avoidance and is a primary factor in a buying decision.
The L.L. Bean people say they don't take lightly state revenue needs and the concern over equitable taxation. But they argue that a collection initiative requiring them to collect taxes in states where they have no physical presence is discriminatory, since the firm doesn't receive the state services purchased with those taxes. (L.L. Bean collects sales taxes in Maine, where it has five retail stores.)
Mr. End, the L.L. Bean vice-president, says handling the myriad tax rates and exemptions in individual states would be a paperwork nightmare.
``The problem with any quick fix to the out-of-state vendor issue,'' he says, ``is that it imposes discriminatory administrative demands on mail-order companies.