States Nervously Eye Rising B-To-B Commerce (04/16/01, 8:32 p.m. ET) Reuters WASHINGTON—Rapidly rising business-to-business sales over the Internet, while still smaller than online retail sales, pose a growing problem for state budgets, a National Governors Association official said Monday.

"They are growing much faster than business-to-consumer sales," Frank Shafroth, NGA's director of state and federal relations, said, saying that smaller firms tended not to pay state sales and use taxes on Internet transactions.

"It's going to be a bigger and bigger part of the equation," he added.

The National Association of Purchasing Management (NAPM) and Forrester Research Inc. said in a new report issued on Monday that 71 percent of manufacturing and non-manufacturing firms use the Internet for indirect purchases, up from 61 percent reported last quarter.

Indirect purchases are third-party transactions made through an intermediary. While the groups surveyed made only 9 percent of their total purchases online, over half said they were just starting out with Internet buying.

NGA, like many other groups representing state and local government interests in Washington, is concerned about the twin impact on local budgets of mushrooming "virtual" commerce and the difficulty authorities have in collecting sales and use taxes on Internet transactions.

They say rules that Internet retailers, like catalog retailers, need to collect sales tax only if they have a store in the purchaser's jurisdiction are eroding their revenue base and threatening services from schools to ambulances.

Shafroth said a November Forrester report analyzing the effect of both retail and B-to-B online transactions on state budgets had shown B-to-B sales overtaking retail sales by the end of 2002.

By 2004, state revenue losses from B-to-B commerce would total $8.1 billion compared to $5.6 billion in lost revenue due to online retail sales, he quoted Forrester figures as showing.

A group of about 30 states are working to simplify the country's unwieldy sales tax system, currently administered by a patchwork of some 7,500 different sales tax jurisdictions, to make it easier for businesses to collect the taxes.

To date, project officials say, four states have passed legislation allowing them to enter into a common sales tax agreement. The project requires a total of five states to sign up for the agreement to kick in.

Even then, compliance by businesses in those states will remain voluntary unless Congress passes bills now pending in both chambers that would force compliance if a minimum of 20 states entered into a pact.

The issue of Internet taxation will be high on lawmakers' agendas this year with a moratorium on new or discriminatory taxes on electronic commerce and Internet access fees due to expire in October.

-- Anonymous, April 17, 2001