Streamlined sales tax might be the answer to state budgetary woes
The Streamlined Sales Tax Project is moving back into the spotlight with some states visibly hurting for tax dollars and a Congress that seems friendlier toward raising taxes.
The project began in 2000 with a group of people who were dedicated to reducing complexity in multi-state tax issues and harnessing the potential of online sales as a source of tax revenue. The current law, established by the U.S. Supreme Court in Quill Corp. v. North Dakota stated that a state cannot require a seller to collect sales tax on sales made to buyers in that state unless that seller has a physical presence in the state.
This case was decided in 1992, long before many people had even heard of the Internet, and three years before Amazon.com sold its first book (which, for you trivia buffs, was Fluid Concepts & Creative Analogies: Computer Models of the Fundamental Mechanisms of Thought).
Today, times have changed, online retail businesses are thriving, and states that once collected sales tax on purchases made in stores with locations you could touch and see, are claiming they are suffering as a direct result of the revenue lost to online sales that produce little or no sales tax.
Last year, New York took a giant step forward and asserted the claim that an online retailer (Amazon.com) didn't have to have a physical presence in the state to be liable for collecting and paying sales tax if it had affiliates located within the state that provided their customers with access (usually in the form of Web site links) to the out-of-state retailer in exchange for a portion of the revenue on the sale. Amazon fought the ruling, lost, and is now appealing.
Meanwhile, the New York experience has emboldened other states, and suddenly the Streamlined Sales Tax effort which seemed like it might be stalled, is picking up steam and heading for a showdown in Congress.
One of the difficulties in executing a sales tax program is that there are more than 7,500 taxing jurisdictions in the country. Companies doing online business nationally would be responsible for collecting and filing income tax returns in all jurisdictions where they have sales. To deal with the problem, the Streamlined Sales Tax Project has contracted with and certified four companies to provide software assistance: Avalara, ADP Taxware, Exactor, and SpeedTax.
According to Kent Chadwick, Avalara's director of compliance, "Limited audit liability protection is one of the many benefits of the Streamlined Sales Tax project, provided the seller uses a Certified Service Provider (CSP). Additionally, SST states hold harmless any sellers' miscalculations in sales tax, granted they were a direct result of errors provided by an SST state’s rate and boundary file. If an audit is required, the SST states have pledged to limit audits to a two year cycle, beginning with an analysis of transactional data provided by the CSP. Avalara works with state auditors to resolve audit issues before the customer is involved. AvaTax provides customers with the most up-to-date and reliable taxability rules, jurisdictional assignments, and sales tax rates. And because the AvaTax service is completely web-based, the service is capturing transactions in real-time and therefore providing completely accurate sales tax calculations. To prevent errors from occurring, the AvaTax system does not permit overrides or edits on SST transactions."
While it's possible that consumers might consider the SST a new tax and might balk at paying sales tax for online purchases shipped from out of state, Chadwick suggested that, "Clear evidence has shown that larger, more established businesses have had few issues explaining the voluntary collection of sales tax to their customers at the point of initial sale. However, smaller businesses have reported customers' objections."
There is a clear move toward finding ways to provide additional revenue to state governments, and there is a definite possibility that the SSTP will find support in Congress.
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Clarification
A point of clarification that may be helpful to readers: There are actually two remote sales tax collection initiatives being discussed in this article - and they are quite distinctly separate efforts. The first initiative is the Streamline Sales Tax Agreement, more on this in a moment. The second initiative is a radically different approach which involves redefining the concept of nexus. This has been enacted in isolation by the State of New York, which has resulted in the ongoing litigation between that state and Amazon.com and Overstock.com. Following New York's lead, similar legislation is now being considered by California, Connecticut, Hawaii, Maryland, Minnesota, North Carolina and Rhode Island. The basics of this redefinition of nexus instruct that when out-of-state company (lets say "Company X") pays a sales commission to a web site located in New York ("Company Y") for linking a customer from Y's website to X's website, then Company X has established economic nexus, and is then required to register as a business in that state - with full licensing obligations and tax collection requirements, just as if Company X had a "swinging door" retail location in that state. This approach seems to target the multi-billion dollar affiliate marketing business, (e.g. Amazon Associates and Overstock.com,) however one of its unfortunate aspects is the requirement for merchants to separately navigate regulations with each of the taxing authorities, which is prohibitive for the smaller sellers that make up approximately half of internet commerce.
The first initiative is the Streamlined Sales Tax Agreement (or SSUTA), a more evenly considered approach spanning almost 10 years of refinement and involving a collective effort of 44 states (including New York, and the other states now considering redefinition of nexus). SSUTA is designed to simplify and standardize sales and use tax laws (including standard definitions for taxable goods, tax holidays, and rate change notices), with the goal of enabling out-of-state sellers to easily comply with local sales tax initiatives.
Streamlined Sales Tax is fair, feasible, and constitutional
Actually, the Quill decision closes with the specific granting of authority to Congress to allow states to tax interstate sales.
From the second to the last paragraph of the decision: "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes." So, while Quill is of course still valid, it anticipates the very scenario we are facing and clearly show how this authority resides with Congress, and is no longer a constitutional issue.
In 1992, it was unrealistic to require remote sellers to keep track of many thousands of state and local tax codes. But with the cheap computing resources and standardized tools available today, the technical capacity to keep track of hundreds of thousands of items, and tens of millions transactions per quarter is no longer in question. In fact, the continued commoditization of computing power is precisely what will enable SST to succeed.
The reason destination-based sales tax works is because it is tax paid by the constituents that both benefit from, and decide on, state sales tax- the citizens of the states themselves. The Streamlined Sale Tax initiative supports taxation WITH representation, taxes to pay for hospitals, police forces, libraries and schools.
This is a state issue
The streamlined sales tax project looks to allow states to violate the commerce clause in the US Constitution. New York will lose their case because of this. But then, we as a country seem to be good at creating policy that pushes more and more businesses offshore.
George W. Wilson, Jr., CPA, CITP
Streamlined Sales Tax is not the answer
Going down this road is dangerous and has constituional ramifications that I am not comfortable with. The states need to deal with the use tax in their states and not look to and burden small businesses outside of their states with their collection issues. The Quill case is still valid law based on the Constitution, specifically the commerce clause in Article 1 Section 8 which deals with regulating interstate commerce. Today it is sales tax, then what is next? We already have enough issues with the various states and their interpretation and application of their tax laws to non-residents. i.e. Driving through a state does not create nexus, although some states on the east coast have claimed.
The ones who are breaking the law in the states are the states own citizens. Enforce it there. States have lost sales tax revenues because of their inability to enforce their laws in their respective states, not because of the effects of ecommerce.
George W. Wilson, Jr., CPA, CITP