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Streamlined Sales Tax: Accomplishments and Outlook Editor: Editor’s note: Ms. Naghavi is chair of the AICPA Tax Division’s State and Local Tax Technical Resource Panel (TRP). For more information about this column, contact Mr. Hogroian at ferdinand.hogroian@us.pwcglobal.com, or Ms. Haffield at susan.haffield@us.pwcglobal.com.
The vote by the streamlined-sales-tax-implementing states to ratify model sales tax simplification rules in November 2002 was a historic threshold. This achievement could not have been foreseen at the time that the National Tax Associations Telecommunication and Electronic Commerce Project or the Federal Advisory Commission on Electronic Commerce failed to produce a cohesive approach to the dilemma of remote sales tax collections. The implementing states (35 states and the District of Columbia) succeeded in forging an agreement between state legislators and state revenue departments (DORs), with the business communitys continual input. The agreement was the result of the hard work of representatives of the state DORs comprising the Streamlined Sales Tax Project (SSTP).
SSTP Made up of overlapping membership with the implementing states (unlike the implementing states, legislation is not required for SSTP participation), the SSTP ground out the terms of the Streamlined Sales and Use Tax Agreement (Agreement) through numerous meetings stretching beyond two years. Its recommendations were generally accompanied by white papers detailing the policy reasons for proposals and a survey of how the member states treated the pertinent issues. The implementing states reviewed the recommendations and adopted them in whole or in part, after considering the political ramifications of each. This two-tier vetting of sales tax simplification proposals may give the current agreement its greatest strength. At the close of 2000, the SSTP approved an agreement containing many of the current proposals simplification provisions. However, the National Conference of State Legislatures declined to endorse the agreement, instead recommending its own stripped-down version. This dichotomy immediately sparked fears that the project was unravelling as soon as it began. However, the end of 2001 saw the creation of the implementing states, setting the stage for a compromise between the technical simplification provisions drafted by the state DORs and the state legislatures pragmatism. Adding to the current proposals strength is the business communitys involvement. While businesses have not had a veto power, the SSTP workgroups are generally an open forum well attended by business interests. The state delegations to the implementing states included several business representatives, including the tax counsel of the Council on State Taxation (COST). One of the Agreements weaknesses (which, in fairness, would be inherent in any model legislation attempting to simplify state sales and use tax administration) is its lack of comprehensiveness. For example, direct marketers have been promoting a single rate per state for years. Although the Agreement requires a single rate at the state level, it allows each local jurisdiction to impose a single rate as well. Further, states with complex local tax structures (e.g., Colorado) have not been participating. In addition, the audit protection afforded to sellers for tax collection errors does not extend to purchasers who pay an incorrect amount of tax billed. Meanwhile, one of the Agreements centerpieces is a taxability matrix, intended to guide sellers and third-party certified service providers in deciding whether to charge tax. This approach was selected by the states after they determined that it would be difficult (if not impossible) to certify each individual sellers system. The completeness of any model sales tax legislation will always remain a question, as it is unknown how the states will interpret the model provisions. Below, in broad terms, are some of the Agreements model sales tax simplification provisions, followed by some of the remaining issues and the overall outlook.
Agreement Structure Under the Agreement, each state has to adopt specific requirements to participate. State-level administration. The Agreement requires state-level administration of sales and use taxes, with sellers only obliged to register, file returns with, and remit funds to, the state taxing authority. It also provides for state-level audits of registered sellers. Uniform tax base. After 2005, the tax base for local jurisdictions has to be identical to the state tax base, with certain exceptions. Seller registration. The Agreement requires each member state to participate in an online sales and use tax registration system in cooperation with the other member states, under which a seller registered under the Agreement is registered in each member state. Notice of tax changes. The Agreement requires states to make a reasonable effort to provide notice of rate and tax base changes, and imposes limits on the effective date of local rate and boundary changes. Database of local jurisdictions. States with local jurisdictions that levy sales or use tax have to provide and maintain a database of all sales and use tax rates for all taxing jurisdictions. In addition, a database has to assign each five- and nine-digit zip code to the proper tax rates and jurisdictions. Such databases, however, are not a prerequisite to participation. The Agreement also requires members to participate with other member states to develop an address-based system for assigning taxing jurisdictions that meet the re-quirements of the Mobile Telecommunications Sourcing Act. Relief from liability. The Agreement provides sellers and third-party collection agents (i.e., certified service providers) relief from liability for collecting the incorrect amount of tax resulting from erroneous data provided by a member state on tax rates, boundaries or taxing jurisdiction assignment. Uniform state rates. The Agreement bars the imposition of multiple state sales and use tax rates after 2005, with certain exceptions. Likewise, it allows only one local sales and/or use tax rate per local jurisdiction (with certain exceptions). Sourcing rules. The Agreement contains general rules for sourcing retail sales (with certain exclusions) and specific rules for sourcing telecommunications services and leases or rentals. It requires a tiered system of destination-based sourcing, applicable to both states and localities: if a product is not received by the purchaser at the sellers business location, the sale is sourced to the location of receipt, including the location indicated by delivery instructions. However, the Agreement provides default rules when information is unavailable to the seller, allowing, in descending order, for the use of an address available from the sellers business records; the address obtained during consummation of the sale; or, if the above information is not available, the address from which (1) tangible personal property is shipped, (2) electronic transmission was made or (3) the service was provided. Multiple points of use. The Agreement also provides for multiple points- of-use exemption forms, which relieve sellers of the obligation to remit applicable tax when the purchaser knows at the time of purchase that a digital good, software delivered electronically or a service will be concurrently available for use in more than one jurisdiction. Separate provisions apply to direct-mail sourcing. Direct pay permits. The Agreement requires each member state to allow the holder of a direct pay permit to purchase otherwise taxable goods and services without paying tax to the supplier at the time of purchase. While each state can set its own limits and requirements for the permit, a model regulation may be developed in this area. Administration of exemptions. The Agreement provides for uniform standards for the administration of exemptions, including a standard electronic exemption form and a waiver of signature requirements for such form. Sellers following the Agreements exemption requirements are relieved of liability when the purchaser improperly claims an exemption (thus, no good-faith standard is applied). Uniform tax returns. Only one tax return is required for each taxing period for each seller in the member state and all taxing jurisdictions within the state. Additional information returns may be required no more frequently than every six months. In addition, returns must be allowed in a simplified format including only specified data fields, contingent on the use of one of the Agreements technology models for tax compliance. Uniform remittance rules. Only one remittance is required for each return, with the option of additional remittances (more than one prepayment may be required). Other uniformity. Other provisions contemplated in the Agreement in-clude uniform rules for recovery of bad debts, a restriction on caps and thresholds beginning after 2005, a uniform rounding rule and protections against customer lawsuits for over-collection. The Agreement contains a library with definitions of the tax base that a state has to adopt in its statutes and regulations if a particular definition appears in its sales and use tax statutes. This intends to preserve the existing tax base, while ensuring uniformity. Product-based exemptions have to conform to the uniform definitions, when applicable, while entity-based and use-based exemptions may apply to undefined subsets of a defined product. Compliance. The Agreement envisions three methods of certified compliance: a certified service provider performs all the sellers sales and use tax functions (other than consumers use tax); a certified automated system calculates the tax imposed by each jurisdiction on a transaction, determines the tax and maintains a record of the transaction; or a proprietary system, in which the seller has entered into a performance agreement with the member states and has total annual sales revenue of at least $500 million. Monetary allowances are anticipated for sellers voluntarily registering under the Agreement, for up to two years. In addition, the SSTP has committed to performing a joint study of vendor collection costs under the Agreement. Amnesty. The Agreement provides amnesty to sellers that register under the Agreement for uncollected or unpaid sales or use tax (together with penalty or interest) for sales made during the period the seller was not registered in the state. Registration has to continue for at least 36 months. The amnesty, however, does not extend to sales or use tax due from a seller in its capacity as a buyer.
Some Outstanding Issues The SSTP meets continuously to resolve outstanding simplification issues, including those involving registration and returns, bundling, certificates of state compliance with the Agreement, digital property, telecommunications, certifications, audit, exemptions and sourcing. Compliance. Governance and the issuance of certificates of compliance continue to be a gray area. States currently considering legislation meant to conform to the Agreement have varying effective dates for these provisions. Because the Agreement cannot become effective until 10 states representing 20% of the population of the states with a sales tax have enacted it, some question remains as to whether states should begin to work on implementing Agreement provisions before the effective date provided in their laws. Sanctions. Another question concerns sanctioning member states. The Agreement provides mechanisms for a wide range of administration issues, including amendments, interpretations and dispute resolution. However, the effect of these Agreement-level interpretations and rulings is not clear. First, the sanctions for states not in compliance are not defined. Second, compliance means a state is substantially compliant with each of the requirements set forth in the Agreement; the definition is silent on the practical effect of Agreement-level interpretations and rulings not incorporated into the Agreement. Registration. As to registration, some questions remain as to when a seller will be deemed to be registered under the Agreement. It appears that sellers will be asked to volunteer to register or state that they need to register, based on their nexus position. In accordance with this interpretation, the Multistate Tax Commission is engaged in a Combined Electronic Registration Project that would provide a longer path for registration, based on data elements required by existing state registrations for sellers in a need to register position. Definition of services. The SSTP has declined to define services in general and has decided not to define the digital equivalent of services, because services are subject to tax at a states discretion, regardless of how delivered. However, the SSTP has proposed defining the digital equivalent of tangible personal property as a product (except for canned software) that (1) is expressed in binary digits; (2) is capable of being processed by a computer; (3) is delivered, accessed or subscribed to, electronically; and (4) the sale of which would be treated as a sale of tangible personal property if transferred on tangible storage media. This last condition is meant to encapsulate the true object test. Bundling. Another outstanding issue is bundling; the SSTP proposes to incorporate the true-object test, providing that a retail sale of tangible personal property and a service is not a bundled transaction in which the tangible personal property is essential to (or facilitates the use of) the service, and has no practical use apart from the service. Under the proposal, a bundled transaction is the retail sale of otherwise distinct and identifiable products that are not optional and is sold for one non-itemized price. The SSTP may propose a de minimis threshold value of taxable products that will not result in a bundled, taxable transaction with nontaxable products. The SSTP also intends to study how states would source various services under the existing Agreements sourcing rules. This would help flesh out areas of disagreement in the interpretation of the rules and provide additional guidance to the states. Businesss concerns. The business communitys concerns go beyond the Agreement and the technical aspects of simplification. Such concerns include states attempting to use sales tax simplification legislation to expand the tax base or attempts to move existing sales and use tax provisions that do not comply with the Agreement into other areas of the tax code (in essence, shifting complexity to other taxes). Another big concern is the availability and cost of technological solutions proposed under the Agreement and the related concern of completing a cost-of-compliance study and adopting its results. Business interests are also concerned that (1) political pressure may result in some states being admitted to the effort without meeting the substantial compliance level or (2) compliance may be interpreted at a lower level than the business community expects.
Outlook Legislation is rapidly moving forward in member states; at press time, Kentucky, North Dakota, Utah and West Virginia have already enacted legislation conforming to the Agreement. Plainly, the sales tax simplification movement is picking up momentum. Increasingly, states want to convince Congress to override Quill (Quill Corp. v. North Dakota, 504 US 298 (1992)) and allow them to require remote sellers to collect and remit sales and use taxes. While such efforts have failed in the past, the states have made enormous strides toward creating a simplified sales and use tax system. The timing of Congressional action may depend in part on whether states can put the Agreements conceptual framework into practice. Further, the business community is concerned with how Federal legislation on Quill may affect the nexus determination by states for other types of taxes (i.e., business activity taxes, including income/franchise taxes). Thus, Congressional legislation in the sales tax arena may become linked to an attempt to codify a physical-presence nexus standard for business activity taxes. Thus, with state action already well underway in 2003 and Federal action a possibility in the near future, sales tax simplification will continue to be one of the main focuses of state taxation for some time to come. |
