This article is provided by David Hardesty, of E-CommerceTax.com
The day when all online sellers have to collect sales tax is not here, yet. However, many in state government, and many Main Street retailers would at least like to see all large online sellers collect tax. There is considerable momentum behind the Streamlined Sales Tax Project, where simplification of sales tax systems would be accompanied by voluntary collection of tax. In Congress, bills are being debated that would create a mandatory duty to collect tax, if state tax simplifications are to the liking of Congress. Yet, for all the activity, we are still far from the point where we will see radical changes in sales tax rules, and nothing has taken on an aspect of inevitability.
The primary goal of the Streamlined Sales Tax Project (SSTP) is to simplify state sales tax. Simplification is to come about mainly by making states operate under a single set of rules. The SSTP has been underway for almost a year and a half, and has so far produced two primary documents, the Uniform Sales and Use Tax Administrative Act (Act), and the Streamlined Sales and Use Tax Agreement (Agreement).
By adopting the Act into law, state tax authorities are authorized to enter into an Agreement with other states. The Act authorizes tax authorities to represent the state in negotiations with other states in the implementation of the Agreement.
The Agreement is a document that provides the rules under which participating states and sellers will operate. The Agreement provides a uniform set of sales tax rules and procedures that Member States agree to abide by. The Agreement is an agreement between the states. It has no direct effect on state law, and has no effect on sellers. Instead, in order to enter into the Agreement, states must amend their own laws to conform to the requirements of the Agreement, and to cooperate with one another. The Agreement takes effect when five states have signed it. (The operation of the Agreement is discussed at Road Rules for the Streamlined Sales Tax).
With this background, let’s look at where the states are in the SSTP process. (Note: the complete status of all states can be found at http://126.96.36.199/sline/statestatus.pdf
This status page is maintained by the SSTP staff).
States that have enacted the Act (as of May 29, 2001).
States that have passed the Act (as of May 29, 2001), but the Act has not yet been signed into law.
Some states have adopted the SSTP’s model Act, while others have adopted the model Act written by the National Conference of State Legislatures (NCSL). The NCSL model Act differs in that its simplification provisions are less comprehensive than those of the SSTP. In a letter to the states, four organizations, The National Governors Association, Federation of Tax Administrators, NCSL, and the Multistate Tax Commission urged states to continue their simplification efforts, despite having adopted different versions of the Act. The letter minimizes the differences between the Acts sponsored by the SSTP and the NCSL.
The Agreement is still in its early stages. The detailed rules that will make up the Agreement are being studied by various workgroups. At a May 7-8, 2001 meeting of the SSTP, workgroups reported progress in such areas as sales tax holidays, caps and thresholds, multiple rates, uniform tax returns, electronic exemption certificates, sourcing of income, privacy, plus definitions of “digital products,” “software,” “leases,” and “rentals.” Groups working on issues related to prepared foods, vending machines, soft drinks, and candy also reported their progress.
In addition to uniform rules and procedures, the success of the SSTP depends on technology that will substantially lessen the burden of remote sellers. The SSTP has a pilot project in the works to test online tax compliance software. At the May meeting the pilot was reported to be ready to get under way. Participating vendors were set to start testing online collection systems in mid-May.
Supporters of the SSTP seem convinced that momentum is on their side. While past efforts to solve sales tax issues on a nationwide basis have failed, this time the effort has major support from traditional retailers. Many of these retailers are worried about the effect of the growth of tax-free online retailing. Main Street retailers are especially concerned that the current tax system gives unfair advantage to online sellers. These retailers can be a powerful lobby in Congress. 
Congress seems to have gotten the message that sales tax is no longer a local issue. Bills by Senators Dorgan (S. 512) and Wyden (S. 288) are both aimed at giving states the power to require remote sellers to collect tax, if the states simplify their tax systems. The bills in some ways mirror the SSTP effort. The prospects for a bill this year, however, are uncertain.
Some believe that federal action is needed before multistate sellers with no physical presence in a state will be willing to collect tax. Without a federal mandate, states will have to rely on voluntary compliance by sellers – something that many say is unlikely to happen, regardless of how simple sales tax collection becomes.
One reason a seller would be reluctant to collect tax is the state income tax. Sales tax and income tax nexus are not linked. A seller may have nexus for one and not the other. In addition, a seller may not have nexus for either sales or income tax in a state, but may voluntarily agree to collect the sales tax. Sellers do not want their voluntary action to create an income tax nexus, where one did not exist previously. There is no guarantee that a seller that voluntarily steps forward to collect tax will not be rewarded for its efforts by a state assertion that it must also start paying state income tax.
Some believe that resolving the sales tax issue cannot be done without also resolving state income tax. Enough hold this opinion that the issue of state business activity tax (franchise tax or income tax) seems to always come up in discussions of expanding sales tax collection.
The toughest part of the simplification process has yet to really get started. Under the SSTP, states must individually adopt laws enacting simplifications specified by the Agreement. This means that legislators in each state house will have to go head-to-head with entrenched public and private interests.
Local governments have already started to object to the SSTP proposals, which would remove some of their power to administer sales tax. Under the SSTP, administration of tax would be only at the state level. Many local politicians and bureaucrats are going to be reluctant to let go of their control over taxes.
Private interests who have fought hard to get special tax breaks will resist any efforts to change the status quo. These groups will lobby hard against any simplification that has the effect of removing cherished exemptions, or other tax loopholes. With money to spend to make their point, these lobbies will be hard to fight.
 See letter dated May 4, 2001, reprinted in 2001 STT 95-30, May 16, 2001.
 “Streamlined Project Meets in Milwaukee,” Multistate Sales Tax Review, May 29, 2001.
 Doug Sheppard, “Where Will Congress End up on the Internet Tax Issue?,” 2001 STT 106-24, June 1, 2001.
 Doug Sheppard, “Senate Commerce Panel's Markup of Internet Tax Bill Canceled,” 2001 STT 106-24, May 2, 2001.