It's been about eight months since the Streamlined Sales Tax Project - the sales tax and use system designed to retrieve lost revenue for states whose tax base is dwindling as a result of online commerce - came into effect on October 1.The goal of the SSTP - which was originally conceived about six years ago - is to formulate a workable interstate agreement that would create a simplified sales and use tax collection system that could be used by retailers regardless of their location. The SSTP establishes uniform definitions of taxable goods, sets rules for sourcing transactions, and centralizes the registration and administration process for retailers to participate in the system.

Thus far, the SSTP is still a voluntary initiative, with well under half of the states signed on as project members. Thirteen states (see box, next page) qualify for the status of "full member" in the SSTP, meaning that they are substantially in compliance with the requirements of the SSTP. Another six states are defined as "associate members," meaning that they have either enacted the provisions of the SSTP but those provisions are not yet in effect, or they have indicated that they expect to have the SSTP provisions enacted by Jan. 1, 2008.

There are other states that have legislation pending that would make them members of the project, but only Vermont is expected to pass such legislation in 2006.

However, momentum for the project is slipping in some states. Utah is an associate member, but lawmakers there have initiated legislation to withdraw. Legislators in Ohio and Texas have voiced concern over the issue of where sales are taxed, and that issue might interfere with their participation in the project.

"Their major complaint focuses on the shift from origin to destination," said John Healy, CPA and faculty member at the University of Wisconsin-Milwaukee in the School of Business Administration. Healy is on the faculty of the Deloitte & Touche Center for Multistate Taxation.

Some states tax sales based on where the sale originates, while others tax sales based on the destination of the sale. Both Texas and Ohio tax sales based on the origin. The SSTP calls for taxation based solely on destination.

Other problems

"There are several pressure points that could erupt along the way and cause some significant problems for the SSTP in terms of its long-range goal of enacting federal legislation," said Healy during a seminar.

Diane L. Hardt, administrator of the Wisconsin Department of Revenue Division of Income, Sales and Excise Taxes, points out several areas within which states and businesses must reach agreement in order for the SSTP to achieve success.

1. Uniform sourcing. Participating states must agree to tax sales based on their destination instead of their origin. While most states already use destination sourcing, Kansas, Ohio, Tennessee, Texas, Utah and Washington use origin sourcing.

2. Uniform definitions. Under the terms of the SSTP, each state still gets to decide what is and is not taxable. However, all participating states must agree on the definitions for those items.

For example, a state can say that it won't tax food, but does food include soft drinks and candy? What about dietary supplements? A problem arises when states already have rules on their books defining these items, and the rules vary from state to state.

3. New technologies. The key to success for the SSTP is to make the process an easy transition for sellers. To that end, the SSTP is in the process of certifying various technological processes for automating the sales tax process. Because there are roughly 8,000 sales tax jurisdictions in the U.S., companies making sales nationwide require a way to comply with the multi-jurisdictional rules. The plan is for third-party providers or software programs specifically designed for the SSTP to be funded by the states that participate in the SSTP. Individual state laws will determine how these resources will be made available to sellers in their states.

But every state has its own unique rules for defining, regulating and collecting sales tax, and businesses located in those states are accustomed to operating under those rules. Trying to blend the rules from 50 states and get the support of the thousands of businesses in those states is a monumental task.

"Personally, I think it's long overdue," said Alan Markle, CPA and co-founder of Larkspur, Calif.-based Wilson Markle Stuckey Hardesty & Bott. He has been telling clients for years that he foresees "a collision course between current law and the reality of the world, the more we do mail order and the more we do e-commerce."

"I saw that the collection of sales tax is going to be a disaster for the states, because they will have to depend on the honesty of all of their citizens, which means nobody will pay use taxes," Markle continued.

Taxpayers who don't understand the tax and are given little or no direction by their states for paying it have long overlooked use taxes. The SSTP, while not taking the place of use taxes, will go a long way to pick up the slack left by purchasers who buy from out of state and don't pay sales or use tax.

Use taxes aren't going away, and purchasers will still be obligated to pay tax, but one of the goals of the SSTP is to take the onus of paying the tax off of the purchaser. "If the vendor collects the tax, it's a more efficient way to do it," said Richard Dobson, director of the Office of Sales and Excise Taxes for the Kentucky Department of Revenue.

"The next goal would be to convince Congress to pass federal legislation, and that would be to require remote companies to begin collecting state sales tax, but I don't think anyone believes that's going to happen this year," said Dan Schibley, news director for state taxes for Commerce Clearing House.

WHO'S IN

Full members

Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota, West Virginia

Associate members

Arkansas, Nevada, Ohio, Tennessee, Utah*, Wyoming

* Utah has initiated legislation to withdraw from the SSTP

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