by Roger Russell
Virginia has become the 28th state to enact legislation to participate in the Streamlined Sales Tax Implementing States. The simplification effort now includes roughly 55 percent of the nation’s population, according to the National Conference of State Legislatures.
The ongoing efforts of the Streamlined Sales Tax Implementing States are the culmination of a three-year push by state legislators, tax administrators and others to implement a simpler, less burdensome process for businesses to collect and administer sales and use taxes and, thereby, stanch the flow of lost sales tax revenue.
As Internet purchases and catalogue sales grow, state and local governments continue to experience lower than expected revenues from sales and use taxes. A report issued in 2001 estimated that states lost a collective $16.4 billion from electronic commerce alone, while in 2006, that loss is projected to climb to $45.2 billion.
"We are overwhelmed by the states’ commitment to making life easier for retailers of all kinds," said Tennessee representative Matt Kisber, co-chair of the SSTIS. "As we move forward, we expect additional states to join the effort. In the end, we should have a system that provides much needed bureaucratic relief to retailers and states and will preserve a revenue stream that is vital to maintaining the basic level of government services."
In 1992, the U.S. Supreme Court ruled in the Quill decision that the current patchwork of 7,500 taxing jurisdictions across the country creates an overwhelming burden on out-of-state retailers and, therefore, they are not required to collect taxes in jurisdictions where they do not have a physical presence. The court implied that states must first simplify their laws in order to require out-of-state retailers to collect and remit sales taxes.
Illinois’ State Sen. Steven Rauschenberger, co-chair of NCSL’s Executive Committee Task Force on State and Local Taxation of Telecommunications and Electronic Commerce, observes that states’ sales tax laws can be cumbersome and confusing.
"Many of the questions that the implementing states are trying to work out may seem quite ridiculous, like, 'Are marshmallows food or candy?’" he said. "The monumental task facing the states is trying to rewrite a series of arcane sales tax laws so that they reflect the constantly changing nature of today’s economy."
The SSTIS is the first process in formulating an interstate agreement that would create a simplified sales and use collection system that could be used by retailers regardless of their location. The system would establish uniform definitions of taxable goods, set rules for sourcing transactions and centralize the registration and administration process for retailers to participate in the system.
"The Quill case said that states can’t force vendors with no physical presence in the state to collect taxes on their behalf because it is more expensive for the remote vendor than the local vendor," said Dr. William F. Fox, a professor at the University of Tennessee’s Center for Business and Economic Research.
Fox, who co-authored a report on state and local sales tax revenue losses from e-commerce, observed that the simplification process would reduce the cost of remote vendors complying with individual states’ sales taxes so that "there would no longer be any reason to excuse the vendor from collecting the tax."
"There is also the hope that if the system is easy enough to comply with, firms will voluntarily collect the tax," he said. "We all win if sales taxes are made more easy to comply with because the economy will run more smoothly."
The consequences of failing to act are dire, according to observers. "The states have come to the conclusion that this is the last best chance to save the sales tax system," said Graham Williams, policy specialist at the NCSL. "If nothing is done and uncollected sales tax continues to grow, at some point the system becomes unsustainable."
As a consequence, said Williams, the timetable for action has been accelerated. "There’s a serious commitment by the states to move quickly. We hope to finalize terms by mid-summer of this year, and have something ready to send back to the states by late August."
The next step is for the states to draft legislation to bring them into conformity with the terms. "Once the agreement is finalized, the states have to take another affirmative step to enact legislation to bring them into compliance with the agreement," said Williams. "Many of the states will do this early next year - but some of them might do this by as early as this fall."
Once a significant number of states have signed on, said Williams, the issue can go back to Congress. "If Congress is persuaded that simplification would remove the undue burden on remote vendors, they can grant mandatory collection authority to the states that have implemented the plan. The other option would be to take another case through the courts and have the Supreme Court address it in the context of the Quill decision, but that would take years."
Although the end goal of the process is to allow the collection of state sales tax by remote vendors, in the meantime, the simplification of the system will benefit retailers markedly, according to Williams. "We’re trying to create a system that will level the playing fields for all involved. A simplified system means that Main Street retailers will have significantly less compliance costs, and this benefits everyone," he said.
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