The Streamlined Sales Tax Project, in labor since 2000, officially gave birth on Oct. 1, 2005, when the threshold of 10 states representing at least 20 percent of the population was crossed."There are now 13 full-member states and five more associate states," said SSTP co-chair Scott Peterson, of the South Dakota Department of Revenue and Regulations. The associate-member states are those that have passed the requisite implementing legislation, but where the legislation had not yet gone into effect by October 1.

The goal of the SSTP 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 system 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.

It also promises a number of benefits for sellers who sign up for the program, including relief from liability for any past taxes that may have been due to a participating state.

SSTP full-member states include Indiana, Iowa, Kansas, Kentucky, Michigan, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota and West Virginia. The associate members are Arkansas, Ohio, Tennessee, Utah and Wyoming.

Although participation in the SSTP remains voluntary for remote sellers, its adherents hope that it will become mandatory, and are pushing for eventual action by Congress to require out-of-state merchants to collect sales taxes on all sales to customers in the member states.

Any doubts as to the obligation of vendors to collect such taxes were erased by the 1992 Supreme Court decision in Quill, which ruled that the current patchwork over 7,600 taxing jurisdictions across the country creates an overwhelming burden on out-of-state retailers. Therefore, it held, retailers are not required to collect taxes in jurisdictions where they do not have a physical presence.

States have lusted after lost revenue from purchases by residents from out-of-state vendors for years. A report issued in 2001 estimated that states lost a collective $16.4 billion in tax from electronic commerce, while the loss was projected to climb to $45.2 billion by 2006.

"The incentive for a company to opt in is that it's a simplified system," said George Farrah, director of state tax services for BNA Tax Management. "Also, the state won't come back at a later date."

"There are a number of reasons a company might not have collected the tax in the past," he added. "They may not have been sure whether or not they had nexus in a particular state, and the system cost more to put in place than they were willing to spend. Moreover, if they made a mistake in putting the system in place, they might have ended up owing money - and they can't go back to a customer to collect tax on a sale they made in the past."

"They knew they might lose customers to a competitor if they charged tax and their competitor did not," Farrah observed. "The hope is that the streamlined approach will bring all these into the system."

Although the total of 18 full-member and associate-member states is less than originally anticipated, more will eventually join, according to Charles Moll, tax partner in the San Francisco office of Morrison & Foerster LLP. "The hope is that other states on the fence will sign up, or that Congress will see that it's working and decide to make it a federal law," Moll said.

Nevertheless, he doesn't see a huge number of companies signing up at the start. "Some have a 'wait and see' attitude; others will never join," he said.

Amnesty for past taxes that a corporation may unwittingly have failed to collect is available to companies that register for the SSTP within 12 months of a state becoming a member.

How it works

Different levels of software are available for companies wishing to comply with the SSTP, according to Peterson.

A certified service provider, or CSP, is used to outsource the entire sales tax responsibility, he explained. Originally, the committee named seven providers that it intended to evaluate as CSPs, but several dropped out of the process and several are not yet fully ready for certification, according to Peterson, who declined to name the companies.

A certified automated system, or CAS, calculates the sales tax, but the vendor retains liability for sending in the tax. The advantage of using a CSP is that the CSP shifts liability to the service provider, effectively insulating the vendor from future audits.

The fact that California and New York have not joined is not a disappointment, said Peterson. "We knew from the beginning that it is a political process, and there are a number of reasons a state might not do it. Some states have a higher priority than the SSTP, and it's something we have to respect."

The National Federation of Independent Business is officially neutral on the SSTP, according to vice president for state public policy Steven Woods. "We asked our members if they support the taxing or authorizing the taxation of remote sales, and 41 percent answered 'Yes,' while 44 percent said 'No,'" he said.

"Our retailers like the idea of simplification and uniformity, and a more level playing field for the brick-and-mortar vendors," he said. "But for everyone else, a tax they're not paying now but will pay in the future is a new tax."

Woods said that he doesn't believe that many small businesses will comply voluntarily with the SSTP in the beginning. "They don't see the benefit," he said. "The real benefit is to the larger companies in terms of tax amnesty and savings in audit costs."

Yet the fact that nexus can change from year to year is a legitimate reason for a company to take advantage of the SSTP, according to Arthur Rosen, partner and chair of the nationwide state and local practice group in the New York office of McDermott Will & Emery. "If a business is concerned about having a physical presence in a state where it has customers, it should seriously consider the automatic amnesty available in the member states," he said.

For those wishing to sign up for the SSTP, the mechanics are easy, according to Peterson. "They have to register in the central registration system," he said. "They simply go to the SSTP Web site and register from there."

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