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The Tax Man Waiteth
by Fresia Rodriguez Cadavid
As states continue their quest to implement a uniform system for collecting online sales taxes, the future of such a dream remains unclear. Federal legislation to allow such an interstate endeavor has not yet been introduced.
The Streamlined Sales Tax Project (SSTP), a quasi-governmental effort to simplify state sales-tax codes in order to foster uniform taxation of online commerce, this month certified 18 states as full members of the tax agreements' governing board during a meeting held in Chicago. The agreement is slated to take effect Oct. 1, when the governing board convenes in Washington for its first formal organizational meeting, according to SSTP co-chair Diane Hardt, who also serves as a tax administrator with the Wisconsin Revenue Department.
The Chicago meeting culminated a series of talks among state officials and business leaders that began in 2000. For the accord to advance further, at least 10 states representing 20 percent of the population must have undergone certification. The states so far admitted into the agreement, including Indiana, Michigan and New Jersey, comprise a quarter of the U.S. population. Associate members include Arkansas, North Dakota, Ohio, Tennessee, Utah and Wyoming. Full members are those states that have changed their sales-tax laws to comply with the pact.
An Uncertain Future On Capitol Hill
Two Supreme Court precedents prohibit states from requiring e-commerce or direct-mail firms to collect taxes on online sales unless they have a physical presence in those states. Some analysts have estimated that states are losing billions of dollars in tax revenue on Internet sales.
Lawmakers on Capitol Hill, however, have been looking to overturn the court rulings. Sens. Byron Dorgan, D-N.D., and Michael Enzi, R-Wyo., have been working on legislation that would let states tax online sales. Both senators introduced legislation based on SSTP in 2003.
"E-commerce has caused a significant change in consumer buying trends. More and more people are making purchases through remote businesses such as online, catalog and phone-order," Enzi said when introducing the bill. "This change has reduced sales-tax revenues to states, cities and towns that rely on this form of revenue to provide essential community services such as education, law enforcement and firefighting."
Although there has been talk of reintroducing SSTP legislation this year, Harley Duncan, executive director of the Federation of Tax Administrators, one of the groups spearheading SSTP, says he does not anticipate serious consideration soon. Quick debate of an SSTP bill could be "unrealistic given the agenda facing Congress in general and the Senate Finance Committee in particular," he said. The prognosis for action later this year or next is better, Duncan added.
Harold Fox, deputy director of New Jersey's Taxation Division and a member of the SSTP steering committee, concurred. He said SSTP legislation is not rising to the top of Capitol Hill priorities. But he also said: "If I learned anything, it's that the chances are unpredictable. [It depends on] how the political winds blow."
State officials are not waiting idly for legislation. SSTP members are reviewing proposals from companies that want to provide the free software to retailers so they could calculate correct sales taxes. To date, seven software companies have submitted bids. They include Avalara, Paychex and Taxware. Once SSTP chooses one or more providers, the companies will begin to provide free software for tax collection and remittance services to e-commerce companies.
The Agenda In The States
David Quam, director of federal relations for the National Governors Association (NGA), outlined commercial benefits offered by SSTP. "Simplification and modernization are as important for businesses that want to do business across state lines as it is for states," he said. "Consistent rules and systems are certainly key to any business plan."
According to Scott Peterson, an SSTP co-chairman and director of the regulations and business tax division of South Dakota's Revenue Department, another organizational meeting will be held in late August in Milwaukee, Missouri. Representatives from all 43 states participating in SSTP will attend to focus on the definitions, rules and procedures governing the agreement. "Between now and then, we should see the development of an online, one-stop-shop registration system for businesses that want to collect [e-commerce] taxes," Peterson added.
Governing board members also will discuss potential amendments to the agreement, Hardt said. Nevada also is likely to be approved as a 19th SSTP member because the state has submitted a petition for membership. After Oct. 1, states can continue to join the governing board "as long as they adopt conforming legislation," she added.
Retailers who begin to participate in the program before its Oct. 1 implementation could take advantage of the agreement's one-year amnesty provision and not be held liable for uncollected taxes on earlier sales. To date, 30 sellers have expressed interest in the amnesty, according to Hardt. She said she expects more dot-com businesses that have brick-and-mortar counterparts to enroll as the agreement advances.
Bruce Johnson, a Utah tax commissioner and member of the SSTP steering committee, said that beginning Oct. 1, businesses will be able to visit a Web site and select the states where they want to do business and collect sales taxes. "If they made sales in a full-member [SSTP] state, they'll have to register for all full-member states" in order to gain amnesty, Johnson explained.
The movement toward SSTP received an added boost last month when a California appellate court upheld a ruling that requires the Borders bricks-and-mortar retailer to collect sales taxes for books and music sold to state residents at Borders' online service.
Battling Tax Misperceptions
Peterson noted that challenges lay ahead for the coalition. In addition to software evaluations, administrative matters, such as where the governing board will be located and how it will be staffed, remain unresolved. Peterson said officials assume that the most logical locale is Washington, but he noted that others said the coalition is not expected to do much lobbying. The coalition also is weighing bylaws.
People on Capitol Hill are watching the states' progress. Enzi "is glad to see states are on track to put in place a voluntary collection system that will allow them to capture the taxes already owed to them under their respective state laws," said Elly Pickett, a spokeswoman for Enzi. She added that while Enzi and Dorgan are working on SSTP legislation for introduction this year, there is no timeline for filing the measure.
Quam noted that while NGA is optimistic that SSTP legislation could be introduced before the August congressional recess, the group recognizes that some lawmakers oppose SSTP and that could pose a problem. House Judiciary Committee Chairman James Sensenbrenner, R-Wis., has voiced strong opposition to the idea, while Quam said others are apprehensive because they misunderstand what SSTP would do.
"Some people misconstrue [SSTP] as a new tax [rather] than a stateside solution to collect tax that has always been owed," he said. "It's getting past the perception of this as a new tax that's our biggest obstacle."
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