States are confronting several sticky issues as they try to develop a Streamlined Sales Tax system that would see out-of-state vendors collect tax on purchases delivered to buyers in participating states, according to CCH Tax and Accounting (CCH), a leading provider of tax and accounting information, software and services and a Wolters Kluwer company. The latest developments – and a look at what has yet to happen to make the system a reality – are laid out in a special CCH Tax Briefing.
According to Daniel T. Schibley, JD, State Tax News Director for CCH, destination-based sourcing is one big challenge to implementing the system.
Applied across state lines, destination-based sourcing means calculating the sales tax for the jurisdiction where the buyer is located and paying the tax to that state. The problem arises when the same system is applied to sales across jurisdictional lines within a state.
"Sales tax rates can change multiple times as you go from county to county and city to city within a single state," Schibley noted. "Smaller sellers are upset at the prospect of keeping track of them all, rather than charging their local rate on all in-state sales. Some local governments also fear they could lose revenue if destination-based sourcing were imposed on in-state sales."
The problem of changing how in-state sales taxes are calculated and paid prevented Texas and Washington from passing comprehensive legislation to pave the way for the Streamlined Sales Tax system, the CCH Briefing points out. CCH identifies Arizona, California, Illinois, Missouri, Pennsylvania and Virginia as other states that could have a problem with this issue. Other potential obstacles to implementation include shortcomings in conforming legislation already passed to fully address issues such as definitions, vendor compensation, safe harbors for overcollection and amnesty.
What to Watch for in 2004 and Beyond
While there are still obstacles to overcome, the benefits to the states are potentially enormous, and this is likely to drive further implementation of the system.
"Right now, states know that they’re failing to collect sales and use taxes on millions of dollars of sales made by mail order, 800-numbers and, increasingly, the Internet," Schibley said. "Implementing the Streamlined Sales Tax system is the most viable alternative to not collecting tax at all."
Under the terms of the Streamlined Sales and Use Tax Agreement among 40 states, a minimum of 10 states representing at least 20 percent of the "sales tax population" must conform their laws to the Agreement before it can go into effect.
If all goes well, the Streamlined Sales Tax initiative may become a functioning reality in 2005 – on a voluntary basis. Bills have been introduced in the current Congress to make the system mandatory, but their prospects in an election year are uncertain.
Even without federal legislation, though, more progress is likely in 2004. The CCH Briefing highlights a number of items to watch for, including: actions in state legislatures to conform to the Agreement; clarification of issues by coordinating bodies, such as the treatment of digital goods and bundled transactions; setting up an administrative apparatus by a committee of conforming states; and enlistment of more support in the business community.
"Even without federal action, the states have made significant strides toward changing the way sales taxes are collected, and we anticipate further steps will be made soon," Schibley said.