Direct-Marketing Firms and States Discuss Sales Tax

Supreme Court's `two-edged' decision fuels continued negotiations. A TAXING QUESTION

DIRECT-marketing companies and state governments are more likely to agree on voluntary collection of sales taxes following a ruling last week by the United States Supreme Court.

"Both sides are giving ground," says Robert Levering, senior vice president for catalog issues at the Direct Marketing Association (DMA).

The ruling updates a 1967 court decision, which allowed companies that direct market in states where they have no physical presence not to collect state and local sales taxes from their customers in those states.

That exemption helped to grow direct marketing from a $2.4 billion industry back then to sales today of $183 billion just for the mail-order segment. It gave catalog companies, telemarketers, and advertisers on cable TV shopping channels a competitive edge over Main Street merchants. It permits tax revenues currently worth more than $3 billion to escape state and local governments.

Last week's ruling involved North Dakota's attempt to require sales-tax collection by Illinois-based Quill Corporation, a mail-order vendor of office products.

One part of the ruling affirmed that requiring out-of-state companies to collect sales taxes would place an undue burden on interstate commerce.

Mr. Levering says that DMA members wouldn't mind collecting sales taxes if it were not so complex. The US contains 6,500 tax jurisdictions, with tax rates that differ even within zip code areas. Sales tax exemptions vary from one jurisdiction to the next according to the item sold and sometimes even according to the age of the purchaser.

Even with a computer's assistance, a telephone clerk might have trouble calculating the tax properly. Catalog operations would resist filling valuable pages with tax calculation instructions for check-writing customers. All in all, collecting taxes would be six times as costly for a direct marketer as for a local retailer, Levering says.

Direct marketers also want to avoid audits by every state. Sears, Roebuck & Co. undergoes 18 to 20 audits a year and always has three auditors in its Chicago headquarters, Levering says.

In the Quill case, the high court confirmed that Congress has the power to make direct marketers collect the taxes. But don't expect that to happen soon, lobbyists for local merchants and direct marketers agree.

"Congress doesn't like this issue to begin with," says Jim Goldberg, counsel for the National Association of Retail Dealers of America (NARDA). "It's very hard to translate it into votes."

Levering points out that when Congress contemplated such a move in 1989, his organization spurred consumers into writing 700,000 opposing letters - more than were generated by the recent outrage over Congressional pay raises. "That killed that," he says.

But while out-of-state direct-marketers will probably remain free of tax-collecting obligations, a second part of last week's decision casts doubt over what they can do within a state and still retain out-of-state status.

"What is a physical presence, really?" Levering asks. Does sending a salesman briefly to a trade show pass the test in that state? Does sending a quality-control executive twice a year to check on a catalog printing run?

There are enough gray areas in the Quill decision to give states grounds for lawsuits that direct-marketing companies could probably win but would rather avoid, Levering says. In anticipation of just such a two-edged outcome, state tax officials and the DMA entered negotiations more than a year ago. The marketers offered to collect a simplified tax if the states wouldn't harass them with lawsuits. They also want to forward taxes to one organization for distribution to the states, and to be subject to a s ingle audit. Such a compact would benefit even the 80 percent of DMA's 3,500 members which are too small to bother joining in, because it would save them lobbying expenses, Levering says.

NARDA members face competition from direct marketers who sell identical "commodity" items: Sony Walkmans, IBM computers, Nikon cameras. It's not unusual for people to visit a store, take up a sales clerk's time, note model numbers and prices, and then go home and order those items from an out-of-state company to avoid paying taxes, Goldberg says. But if direct marketers begin collecting 7 percent tax or better, "that levels the playing field."

Negotiations have been "very intense and productive" over the last three months, Levering says. The two sides are close to agreeing on the major principles. Marketing companies at first wanted one tax rate for all the states, but have given up on that idea, Levering says. Instead a different rate will apply to each state.

How high that rate is set is "a very critical issue," says Wade Anderson, assistant director of tax administration in the office of the Texas Comptroller of Public Accounts. Mr. Anderson, one of the negotiators for the states, says the marketers offered to collect a tax equal to the lowest rate in each respective state. The states rejected that, but are having trouble selling the average state rate to the DMA, he says. Anderson says an agreement could come in four to six months.

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