Washington Governor Signs Internet Tax Bill

By JENNIFER BYRD, AP
Forbes Magazine

03.23.07

Saying it will level the playing field between in-state and out-of-state businesses, Gov. Chris Gregoire has signed a measure that encourages Internet and catalog companies to collect and send the state sales taxes on purchases made by Washington residents.

"This is absolutely about tax fairness to the businesses of the state of Washington," Gregoire said as she signed the bill into law Thursday.

Washington will join 21 other states that have passed legislation to become members of the Streamlined Sales Tax Project.

More than 1,000 companies that sell products in multiple states have voluntarily agreed to begin collecting and distributing sales taxes to any state that agrees to become a member of the project.

The state Department of Revenue predicts that by joining the program, Washington will initially see an additional $35 million to $40 million in sales taxes from out-of-state companies that sell products to Washington residents.

A 1992 U.S. Supreme Court ruling prohibits states from forcing businesses to collect the states' sales taxes unless the company has a physical presence in the affected state. The court noted the dizzying array of tax jurisdictions and widely varying definitions of taxable goods.

The law will streamline those definitions.

Washington has been working on joining the project ever since it was started in 2000 by national tax and government associations, Revenue Department spokesman Mike Gowrylow said.

People who purchase items from out-of-state Internet or catalog companies are currently supposed to pay the sales tax, but rarely do.

The measure, which was requested by Gregoire, easily passed the House and Senate this year. It passed the Senate last year, but got held up in the House.

"There isn't anybody in the Legislature that doesn't know how hard this has been on both sides of the aisle," Gregoire said. "It's been a long haul, a lot of hard work."

The main sticking point revolved around a change the law makes on where sales tax goes when it is collected. Under current law, the jurisdiction where a product originates receives the sales tax. That doesn't help the state, if the product originates with an out-of-state Internet company.

Under the measure, the jurisdiction where the product is delivered would get the tax.

The change benefits some cities and towns, but hurts others. To solve this problem, the measure calls for mitigation, in which jurisdictions that lose money would receive payments from the state.

The measure does not go into effect until July 2008, so businesses and local governments will have a chance to implement the change, Revenue Department director Cindi Holmstrom said.

"We're going to have a really intensive education effort," Holmstrom said. "We're going to hit the ground running now."

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