Tax program seeks uniform collection
Since 2000, states have been working on the Streamlined Sales Tax (SST) Project to create a uniform set of procedures for businesses to follow to remit sales and use taxes. The project is simplifying tax systems nationwide so that state and local governments can more easily collect taxes on interstate sales occurring on the Internet, over the phone or by mail.
As a result of the 1992 Supreme Court decision in Quill v. North Dakota, states, cities and counties are barred from enforcing tax collection on catalog or Internet sales by companies that are not located in their jurisdictions. Unless Congress passes federal legislation authorizing sales taxes on all sellers and all types of commerce, only the retailers’ in-state sales revenue is subject to local taxation.
Because tax laws vary widely by state, businesses have been reluctant to spend the time and money to collect and remit taxes on goods sold all over the country. According to a University of Tennessee study, $15 billion to $20 billion in sales tax goes uncollected nationally, says SST Project Executive Director Scott Peterson, most of that coming from “remote” sales by catalog, phone or the Internet.
“While catalog and phone sales were of interest in 1992, it was not significant enough to warrant the effort to seek congressional authority to collect sales tax on interstate sales,” says Michael Bailey, finance and information services administrator for Renton, Wash. “With the growing role of the Internet on retail sales, states and business have looked for a way to create equity in the application of sales taxes.”
The SST Project has created rules that make it easier for businesses to remit taxes on out-of-state sales as well as for state and local governments to collect them for all sales, in-store and within the state. The SST rules reduce the number of state and local tax rates, provide uniform definitions of taxed items and reduce the paperwork required from retailers. “Our task is to find ways to make the sales tax collection system less expensive for retailers to administer,” Peterson says. A PricewaterhouseCoopers study released in May showed that retailers spend about 3 percent of their sales revenue to collect the tax.
Since October, when the SST Project officially launched, 19 states have changed their tax laws to conform to the SST rules, and 600 businesses have registered with the project to collect and remit sales taxes. SST member states have agreed not to seek back taxes and penalties from registered businesses, says Bailey, the local government representative on the SST Governing Board. The board has contracted with two companies — Bainbridge Island, Wash.-based Avalara and Wakefield, Mass.-based Taxware — to work with businesses to remit taxes.
Minnesota, one of the participating states, has a $645 million gap in sales tax collection, about half of which is from “remote” sales, which James Zwilling, spokesman for the state’s Department of Revenue, says motivated the state’s involvement in the SST Project. So far, 65 businesses in the state have registered to participate, and they have remitted $10 million in sales taxes. The state expects to collect another $32 million by June 2007.
As states change their tax laws to conform to the SST rules, they may affect local government revenues. Washington is working to conform to the SST rules by next year and expects to collect $32 million in the first year, Bailey says. However, the legislation will change who gets the credit for the sale locally, shifting it from the point of the sale to the point of delivery. Although many local governments in the state will receive more sales taxes, Renton, Wash., expects to lose about $1 million per year, roughly 5 percent of its sales tax. As a result, the state legislation will include a plan to mitigate the shift of local sales taxes lost. In other states, the sourcing issue seems to be the most significant hurdle in adopting the SST rules, Bailey says.