States are intensifying theirefforts to confront the challenge of winnowing down budget shortfalls by raising sales tax rates, increasing the number of items taxed, and more aggressively asserting nexus.

"States are facing huge shortfalls, with 2011 predicted to be even worse," said Carla Yrjanson, vice president of tax research and content for indirect tax at Thomson Reuters. "They need to do things they can control, and one of these is to expand the definition of nexus, and who needs to pay. The other is to increase taxes, and there is a lot of activity in that area."

Consumer taxes for retail sales items, gas and cigarettes all continue to climb, according to an annual survey of consumption taxes by CCH. "From the increases in consumer taxes, it's evident that many states are trying to shore up revenue shortfalls," said CCH senior state tax analyst Daniel Schibley. "Many other states have not yet increased taxes, but may do so." (For more on what states are doing in the areas of personal and business income tax, see "Digging deeper," page 10.)

Sabrix, the sales and use technology provider of Thomson Reuters, reports that there were a total of 131 changes in sales and use tax in the second quarter of 2010, with 91.6 percent of them increases or new taxes. There are typically over 1,000 changes per year, with the majority occurring in January and July.

The last quarter was the first quarter in a year-and-a-half in which overall revenue increased, she noted. "It's not because of the economy picking up, but because of additional revenue from tax increases," she said.

Nexus, the minimal constitutional level of activity that would allow a state to assert taxing authority over an out-of-state entity, is a sticking point.

NEW LEGISLATION AND THE SST

The Main Street Fairness Act, introduced in July by Rep. Bill Delahunt, D-Mass., is a proposed solution. It attempts to put local brick-and-mortar retailers on an equal footing with remote retailers while helping states collect the billions they consider are owed them.

"Sales tax revenues comprise up to a third of most state budgets," said Delahunt. "This year, an estimated $18.6 billion will go uncollected; by 2012, the states will be losing at least $23 billion annually, based on conservative estimates. From 2009 to 2012, this amounts to a low of approximately $55 billion. In some cases, these revenue losses can comprise up to one half of a state's budget shortfall."

The Main Street Fairness Act would provide congressional authority for the Streamlined Sales Tax Agreement to take effect. It does not compel any state to join, but those that have adopted this system, or choose to in the future, would then be able to require online retailers to collect and remit sales taxes.

The Streamlined Sales Tax Agreement was created by the National Governors Association a decade ago in response to the U.S. Supreme Court holding in Quill that a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state.

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