Mid-size businesses, or tweeners, that have both storefront and Internet operations and a substantial amount of gross sales, stand to be hit hard by compliance burdens in a new effort by Washington state to boost tax collections and level the playing field between local businesses and out-of-state Internet and catalog retailers.


The effort involves a new law that will change the state to a destination-based sales tax-collection system from one thats origin-based and is expected to cause bookkeeping and accounting headaches and expenses for those businesses.


Like any legislation, we hand it over to an agency to implement, and then you folks get to step on the land mines, Marr, who is in his first term as a state senator after selling his interest in the Foothills Lincoln/Mercury /Mazda auto dealership last year, told Spokane businesses in a meeting last week.


The story of unfair competition is a familiar one: A customer examines a product at a local store, takes up a store employees time to ask questions about it, then buys the item from an Internet or catalog retailer. If the Internet or catalog business is based in another state, it usually doesnt collect sales taxes on the purchase.


Washington state residents who make such purchases are required to pay the tax to the state, but few do, and the state loses an estimated $10 billion in sales and $700 million in sales tax annually through such transactions.


To combat the problem, the 2007 Washington Legislature adopted the Streamlined Sales and Use Tax Agreement, becoming the 22nd state to join the Streamlined Sales Tax Project, Marr says.


Proponents of the project hope eventually to persuade Congress to set up a national sales-tax collection system.


More than 1,000 U.S. Internet and catalog retailers have pledged to collect sales taxes on orders from customers in the states that belong to the Streamlined Sales Tax Project, Marr says.


By joining the system, those businesses will receive amnesty for past taxes that might be due if Congress sets up a nationwide collection system.


To become part of the Streamlined Sales Tax Project, Washington will change on July 1, 2008, from an origin-based tax collection system, in which sales taxes are collected for and credited to the jurisdiction from which businesses ship products, to a destination-based system, in which the tax will go to the jurisdiction to which products are shipped or delivered. While the change wont make any difference when customers buy or pick up goods at a businesss premises, it will affect a lot of businesses to some degree because it will cover sales in which goods are shipped or delivered within Washington state.


Certainly, this is something that will affect every retailer, Marr says. It may have a nuisance impact with small businesses.


The popular QuickBooks accounting software program lets small businesses put in sales-tax codes for shipped products, Marr says, and he understands that additional plug-in programs are available for QuickBooks that enable users to automate the process of determining sales-tax rates. Also, he says, the state is offering businesses that have less than $500,000 in annual sales a $1,000 tax credit to defray the costs of changing their accounting and point-of-sale systems, or two years of free help from a state-certified service provider that will handle the filing of their tax returns so theyre in compliance.


We have a much higher cost to comply, and were not getting anything, says Laron Eakins, chief financial officer of Huppins Hi-Fi, Photo & Video Inc., of Spokane, which also operates OneCall.com, an Internet retailer. Already this year, OneCall has shipped items to 325 ZIP codes in Washington state alone, Eakins says. Our biggest challenge would be getting those tax tables integrated with our own production software, which would cost tens of thousands of dollars, he says. On an annualized basis, the 325 Washington ZIP codes are just 2.5 percent of all of the ZIP codes to which OneCall ships merchandise, Eakins says.


Paul Fish, owner of Mountain Gear Inc., a Spokane outdoor equipment company that has built up a sizable Internet business and runs a retail store here, says his company likely will have to spend $25,000 to obtain an update from its vendor for its Internet-business shipping-software system. It will lay out another $2,000 a year to keep its software in compliance and spend $25,000 in back-end costs, including several weeks of our programmers time, says Fish, who estimates that Mountain Gear will plunk down somewhere around $100,000 in all to comply with the new system.


It wont cost big retail chains much to comply with Washingtons new system, Fish says.


They have to do it because they already have stores in more than one state, and generally speaking, already are set up to comply with tax systems across the nation, he says.


Its the tweeners, like Mountain Gear, OneCall, and Rings & Things, a Spokane bead and jewelry-component wholesaler, which have busy Internet outlets and customized direct-sales software and shipping software, that face hefty burdens, Fish asserts.


Tweeners are those who will get hurt, says Amber Carter, tax policy director of the Association of Washington Business, who also attended the session here. She adds, Service companies are not affected.


Washington retailers that ship goods to out-of-state customers wont be required to charge sales tax on those purchases unless they have a physical presence in those other states, although they can voluntarily elect to join the Streamlined Sales Tax Project. Yet, even though the decision whether to join is voluntary, what theyre giving you is amnesty against coming back and auditing you later, and thats big, says Fish.


Cindi Holmstrom, director of the Washington state Department of Revenue, who also attended the session, says the department knew that the assistance offered to businesses to help with compliance probably wasnt enough, but the department hadnt done adequate analysis to offer more.


State Rep. Alex Wood, D-Spokane, says the legislation to authorize the Streamlined Sales and Use Tax Agreement was brought up quickly and added, If theres 21 states in the system, this should be national. The Internet is international. Lets face it.


Holmstrom says bills have been introduced in Congress again this year to set up a national collection system.


I dont think theyll pass this year; they will pass eventually, she adds. If and when Congress acts to make the Streamlined Sales Tax mandatory, the states that are members of the agreement have to provide vendor compensation to businesses for collecting the tax.


Nevertheless, the system could help Washington state because its dependent on the sales tax much moreso than other states, Marr says.


He says its been estimated that the state could collect as much as $35 million to $40 million in additional sales taxes in the first year after adopting the system.


The payoff on this is down the road, he says. He says he would have preferred to have something implemented on a revenue-neutral basis with the business community.


Fish says, I cant imagine that the businesses of the state wont spend more than $40 million in the first year of implementation, although after the meeting here he credited the lawmakers and tax officials for their approach to the matter, saying, I didnt think that meeting was at all confrontational.


State Rep. Timm Ormsby, noting that Marr had said the purpose of the meeting wasnt to sell businesses on the system or to go into granular detail about it, quipped, The Legislature is not granular, to use Chris word. Its salt lick when it comes to overview.


The Department of Revenue will hold two workshops on the new tax-collection system here on Sept. 12 at the Northwest Museum of Arts & Culture.


One, from 10 a.m. to noon, already is full. Businesses can register online for the second workshop, scheduled from 2 p.m. to 4 p.m.


Contact Richard Ripley at (509) 344-1261 or via e-mail at editor@spokanejournal.com.