The Steamlined Sales Tax Project

Authors:

Virginia A. Gates, CPA
Partner
State Tax Consulting

Ferdinand Hogroian, CPA
Senior Associate
State Tax Consulting

PricewaterhouseCoopers LLP
Washington, DC

Editor's note: Virginia Gates is a member of the AICPA's State and Local Tax Technical Resource Panel. For additional information, Ms. Gates can be reached at virginia.gates@us.pwcglobal.com .

Many states are working together on the Streamlined Sales Tax Project (SSTP) to develop a simplified and uniform system of taxation. The states hope this project will significantly reduce the burden and compliance costs of collecting sales and use tax and simplify the tax rules. The SSTP is focusing on improving sales-and-use-tax administrative systems for both Main Street and out-of-state vendors for all types of commerce. The SSTP's roots are in the work of the Advisory Commission on Electronic Commerce (ACEC). The ACEC was established under the Internet Tax Freedom Act (ITFA), and was charged with conducting a thorough study of the Federal, state, local and international taxation and tariff treatment of Internet transactions.

The nexus standard that governs the current U.S. state and local sales-and- use-tax system was established by the Supreme Court in Quill Corp. v. North Dakota, 504 US 298 (1992). In Quill, the Supreme Court held that the U.S. Constitution's Commerce Clause bars a state from burdening interstate commerce by imposing a sales-or-use-tax collection responsibility on a seller unless the seller has a physical presence in the state. Accordingly, out-of-state sellers that do not have a physical presence in a state can make sales to an in-state consumer without responsibility for collecting and remitting sales or use taxes to the taxing jurisdiction.

Today, there are more than 6,000 overlapping state and local jurisdictions that can impose sales and use taxes. Each jurisdiction is constitutionally empowered to determine both the sales-and-use-tax rate that applies within its borders and the transactions taxed. This system has led to an increasingly complicated quagmire of multiple sales-and-use-tax rates, multiple characterizations of the same transaction and multiple audits of the same transaction by multiple authorities.

Sellers are responsible for complying with the sales-and-use-tax regulations of every jurisdiction in which they have a physical presence; the consumer is responsible for remitting sales and use tax, when appropriate, if the seller does not have a physical presence in the consumer's state (and thus is not required to collect sales and use tax). The administrative burden on sellers and consumers has fostered both their witting and unwitting noncompliance, which, in turn, has increased the enforcement burden on states.

SSTP Overview

The purpose of the SSTP is to simplify and modernize sales-and-use-tax collection and administration. Thirty-two states are voting participants in the project, via either legislation, executive orders or similar authorization. In addition, six states are nonvoting participants. On Dec. 22, 2000, the state representatives to the SSTP unanimously approved a Uniform Sales and Use Tax Administration Act (Act) and Streamlined Sales and Use Tax Agreement (Agreement) and forwarded them to the National Conference of State Legislatures (NCSL) for approval. The SSTP compact will become effective when five states formally adopt it; other states will be allowed to join when three-quarters of the compact members find that these states have complied.

The NCSL unanimously approved its own version of the Act and Agreement on Jan. 27, 2001 (which would take effect after five states pass the NCSL Act and Agreement). While the Act allows states to enter into the Agreement, it is the Agreement that actually contains the substantive simplification rules.

SSTP Status

Thus far, 20 states have enacted either the SSTP or NCSL models for streamlining legislation (see Exhibit 1). Other states can join on condition of a three-fourths vote by compact members. Legislatures in Massachusetts, Ohio and Pennsylvania are still in session and are considering enacting legislation.

While both the SSTP and NCSL Acts provide states with the authority to enter into a multistate sales-and-use-tax compact, it is the conforming provisions in the Agreement that contain the substance of simplification. As noted in Exhibit 1, only two states, Minnesota and Wyoming, have actually conformed their tax codes to the model simplification provisions. Whether states will actually conform to these streamlined provisions (such as model definitions in the SSTP Agreement) in subsequent legislation is a subject of debate. For example, while North Carolina is listed by the NCSL as having enacted the SSTP Act and Agreement, its provisions contained deviations from the Agreement, such as modified definitions of certain kinds of taxable and tax-exempt foods. In addition, state legislation may be silent as to portions of the Agreement, leaving it up to the NCSL or SSTP governing body to determine if the state laws conform to the provisions.

The NCSL has indicated that all the states enacting either the SSTP or NCSL Act would be considered governing members of the project, notwithstanding the requirements for compliance contained in the model provisions. This new governing body will include as many representatives as authorized under the various state measures, although each state will only have one vote. The development of the Agreement (to be presented to next year's state legislatures) would then be in the hands of a body made up of both state tax administrators and legislators (as well as possibly business community representatives). The first meeting of the governing states was scheduled for Nov. 28–29, 2001, in Salt Lake City. However, the SSTP has scheduled a meeting for Dec. 3–4, 2001, in Denver. As a result, the governing states may not be able to consider revisions to the Agreement that may be approved by the SSTP, although they may base their actions on the results of SSTP work groups that have met already this fall.

The SSTP released draft issue papers in August 2001 on food, prepared food, vending, candy, soft drinks, bad debts, rounding, direct-pay permits, caps and thresholds, sales-tax holidays and the multiple-point-of-use form. The drafts, as well as other information about the SSTP, are available on the SSTP's Website at www.streamlinedsalestax.org .

Specific Provisions of the SSTP Streamlined Sales-and-Use-Tax Agreement

The SSTP provisions include:

• Online seller registration effective in every member state. No signature is required and an agent may register a seller.
• Sales and use tax amnesty for registrants not registered to collect tax in the state in the year prior to the state's participation in the Agreement. Amnesty applies to uncollected or unpaid sales or use tax or both, and penalty and interest for sales made when a seller was not registered in the state and when the seller registers within a year of the state's participation in the Agreement. Amnesty will not apply to matters for which the seller is under audit or for amounts already paid or remitted to the state or collected by the seller. In addition, the seller must continue registration, collection and payment for at least 36 months for the amnesty to be fully effective, and the statute of limitations for asserting tax liability tolls during that period. Amnesty applies only to sales or use taxes or both due from a seller (in its capacity as a seller) and not to those taxes resulting from its capacity as a buyer.
• Uniform definitions, including states' ability to tax any item or service. States are bound by the uniform definitions for all the items and services listed and cannot exclude an item listed within a definition.
• States not bound by the uniform definitions for food and food ingredients if the taxation or exemption of food is based on an existing prohibition or requirement in the state's constitution.
• Uniform sourcing rules. These rules allow sourcing of sales to a purchaser's address available from business records or a transaction, when location of a receipt is not known; when the location of a customer is not disclosed, the sale may be sourced from where tangible property was shipped or digital goods were first available for transmission.
• Uniform rules for administration of exemptions. This includes a standard form for claiming exemptions electronically, which provides sellers with liability relief on exemptions im-properly claimed by the purchaser.
• Certification of software used to calculate the tax imposed by each jurisdiction on a transaction, determine whether an exemption applies, determine the amount of tax to remit and generate reports and returns.
• State certification of "certified service providers" to use the software system, remit the taxes and file returns on the behalf of sellers.
• One return per taxing period to be filed for the state and all localities. Member states must participate in developing a more uniform sales-and-use-tax return, and uniform remittance rules, including no additional return required for additional remittance.
• States' discretion to require certain sellers to file returns and remit taxes electronically. The Agreement intends all member states to be able to receive returns electronically by Jan. 1, 2003.
• State-level administration of all state and local sales and use taxes. Localities and states must share the same tax base, with no more than one sales and/or use tax rate per locality.
• Although not a requirement for entering the Agreement, states with local sales and use taxes are to provide and maintain a database, assigning five- and nine-digit zip codes to tax rates and jurisdictions. Such states must also participate in developing an address-based system for assigning taxing jurisdictions.
• Relief from liability.
• Compensation for implementing new technology by sellers for the first two years of participation. This includes compensation for certified service providers.
• Confidentiality and privacy protections for participants and consumers.
• Uniform bad debt rules. This includes deductions allowed, definition of "bad debt," debt collection and assumption of the bad debt.
• SSTP registration and collection of sales and use taxes in the member states not to be used as a factor in determining seller nexus.

The NCSL version allows states with a uniform base to levy a lower rate on clothing, electricity, gas and other items specified in the agreement, deletes all uniform definitions and the uniform bad-debt-rule provisions, eliminates the uniform rounding rule and deletes other SSTP provisions on caps, thresholds and sales-tax holidays.

The Future

While many believe that the SSTP efforts will ultimately be for naught, practitioners and their clients should be familiar with the issues the SSTP addresses, as it appears more likely than ever that all remote sellers will have responsibility for collecting tax at some point in the not-too-distant future.

Businesses will be significantly affected by the Act and the Agreement, including the changes in the definitions of property and services, sourcing rules, costs of new technology, management of future sales-and-use-tax audits, treatment of new and existing exemptions, etc. Practitioners should make their clients aware of the potential impact of the SSTP proposals so that they and the business community can provide input and feedback to the SSTP during the process. If the SSTP is successful, such input will help ensure that the resulting tax system provides simplification and efficiency for businesses of all sizes and industries.