may the force be with you

For years, states and online retailers have bickered over whether the retailers should -- and, if so, could -- collect local and state sales taxes on purchases made over the Internet. The states have said they should and could. The retailers have argued that the complexity of different tax rates and categories among states and localities made it very difficult to do so.

Hoping to put an end to that argument, 18 states tomorrow will implement a long-planned move to remove obstacles that the retailers have cited. Architects of the Streamlined Sales Tax Project are devising a computer program that tracks the tax rates of the 18 states and their localities and automatically adds that rate to the bill of every online purchase. The states will also entice online retailers to collect state and local sales taxes by offering amnesty on taxes the retailers haven't collected in the years since the Internet retail boom began.

QUESTION OF THE DAY 1 • Vote: Should items bought online be subject to sales taxes?2

There is no uniform law governing the collection of online state sales tax for customers outside the state in which a store operates. In the past, some retailers have argued that they had to collect sales taxes only if they had a physical presence in a customer's locality. Some retailers also have argued that they should be exempt from collecting sales tax even when they do have a physical presence in a state, if they keep their online operations separate. And many retailers have cited a 1992 Supreme Court ruling that said that it would be too onerous for e-tailers to calculate all the permutations of differing state and local tax rates.

One goal of the project was to remove the ruling as a key defense for online merchants.

The issue is increasingly important to cash-hungry states as online sales skyrocket. A recent study by William Fox, an economist at the University of Tennessee, estimates that states and local governments will lose $18 billion in online sales tax in 2005. To ensure that they get their share, 18 states have banded together to simplify their myriad tax rules, regulations and quirks.

Besides offering up the tax-collection software, states have rewritten laws so that tax categories that previously differed from state to state are more uniform and less confusing. In some states, for example, candy is taxed at a different rate than other food. The new effort seeks to erase those kinds of distinctions.

But the streamlining effort could fall short of its goals. The majority of states still haven't signed up while retailers have taken divergent approaches to the tax question.

And they may continue to do so. Online retail giant Amazon.com Inc., for example, calls the initiative "a good first step down the long road of truly simplifying sales taxes," according to a company statement. The company does collect taxes in the few states that target online sales to its residents, but wouldn't definitively say whether it would join the effort until it sees how things shake out.

Many stores, including Wal-Mart Stores Inc., Target Corp. and J.C. Penney Co., are collecting taxes from online purchases because they typically also maintained physical stores in many states. In some cases, they started to collect the taxes in response to lawsuits, and still have uncollected taxes from prior years. By signing on to this agreement, retailers remove the threat that they could be taken to court to collect back taxes.

The states that have signed on are Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota and West Virginia. Five more -- Arkansas, Ohio, Tennessee, Utah and Wyoming -- are in the process of finalizing the requirements needed to join, while Washington, Texas and Nevada are in earlier stages.

Other states have deeper reservations about the project's tax collection method. One sticking point has been the group's decision to tax online sales at a destination -- that is, the locality where the customer is -- instead of at the purchase point (as done in brick-and-mortar stores). Some local governments with distribution warehouses are worried that they will lose millions in sales taxes because the tax money would go to another jurisdiction.

That debate has slowed the adoption of the Streamlined Sales Tax Project in Texas, for example, where there are a lot of distribution centers in rural districts that want the tax money for themselves.

New York and California, with two of the country's biggest state economies, have so far not signed on because they aren't yet able to easily standardize their local tax laws for the project.

Consumers won't immediately feel the impact of the Streamlined Sales Tax Project. Retailers have a year to sign up for the amnesty and agree to begin collecting state and local taxes.

Both Wal-Mart and J.C. Penney say that they are in full support of the streamlined agreement and have already signed on. Some retailers are reluctant to announce their participation for fear that a state that isn't among the 18 will view their participation as an admission of guilt. And they don't want to publicize exactly when they began collecting sales taxes for fear that they would be sued in various states for uncollected back taxes.

"Sometime after Oct. 1, retailers would reveal their names," said Maureen Riehl, vice president of governmental relations for the National Retail Federation, which was part of the negotiations.

Despite its complexity, the project may be the best chance for states and localities to collect taxes without spending years in court or launching investigations into individual companies. In 2004, Office Depot Inc., Wal-Mart and Target settled an Illinois lawsuit in which they agreed to pay nearly $2.4 million in sales taxes covering transactions up to 2003.

Loren Chumley, Tennessee's commissioner of revenue, says that her office has a list of online retailers that she will contact and urge to sign on to the tax agreement. The implicit threat is that they could face court action if they don't comply. But many states say they don't have the manpower to track down hundred of retailers that owe the taxes and then take them to court.

The new agreement provides another plus for the retailers: They will now be absolved from paying penalties on any mistakes and miscalculations made if retailers don't collect the correct tax, so long as they use the tax project's system.

J.C. Penney, for example, has had to pay penalties on miscalculations of online sales taxes. Wayne Zakrewski, the company's tax lawyer, says because of the complicated calculations, "errors are more often the case than not."

Write to Robert Guy Matthews at robertguy.matthews@wsj.com³