A Grab Bag Of Ideas
     The multistate discussions won't mark the first time a handful of states have tried to simplify the sales tax structure. The Northwest Regional Sales Tax Pilot Study has been working for one year with government and industry in Idaho, Utah and Washington to craft common definitions for taxable items. In conjunction with retailers such as Starbucks, Costco, Albertsons and Nordstroms, the group has been trying to determine, for example, what to do about items that are placed in different tax categories in different states. It has proposed legislation establishing that local districts only can change their tax rates four times a year, the first day of each financial quarter, said Will Rice, the Washington Department of Revenue's deputy director who has worked with the project. But that's just the beginning.
     "When we set up the project, we first looked at the companies involved that actually did business in the three states and the one comment they made was 'This is nuts!'" Rice said of the previous system. But now each state is going forward with its own streamlining process as well. Washington has used global information systems to map every address in the state and determine its correct local tax code. And the group will continue to work on streamlining tax exemptions for certain groups and resellers.

How To Make Common The Uncommon
     The group assembled by NCSL will take a look at the example of the northwestern states to begin, and Osten said a similar e-commerce tax study done by the National Tax Association will give them guidelines when looking at how to establish common definitions and product codes. While such a task is challenging enough when considering the state of the sales tax system, it is further complicated by the politicization of the issue, and many groups are skeptical as to whether such a program can be successful.
     "My general take on that is it's going to be a difficult venture," said Donald Bruce, an assistant professor at the University of Tennessee who recently authored a study, "E-Commerce in the Context of Declining Sales Tax Bases," commissioned by the National Tax Association. "Just as technical and as difficult as the sales tax system is, as difficult and as complex the reform is going to be. There's no easy way out."
     The group also has received criticism from the anti-tax movement for even meeting. "I think that the idea of states entering a cartel to soak their own taxpayers is a terrible idea," said Ron Nehring of the conservative group Americans for Tax Reform. "States would face a constitutional question if they went ahead and cut some deal on their own."

Whose Trusted Third Party?
     The discussions are scheduled to take place this month for states that have authorized their participation, and NCSL's Osten said the group intends to produce some legislation for next years' sessions. After that, they will begin working on a way to enforce the sales tax on electronic commerce — an even more tricky political process. The "Streamlined Sales Tax System for the 21st Century" proposed to the Advisory Commission on Electronic Commerce is undergoing a face-lift in the form of some compromise and restructuring. Most of the attention has been focused on the "trusted third party." After criticism that the system might jeopardize consumer privacy, there was some speculation that the state governments would be willing to part with the system in the name of compromise. Now it seems it will be reworked.
     "The trusted third party has taken on a connotation a little more…well, it's got baggage," said Osten. "I still think there'll be some form of it, but we'll have a new name for it."
     He said that the trusted third party usually referred to the technology used to achieve the plan and added it could still be used but with some minor retooling.
     That could appease some retailing groups, which, while they have supported the position of the state and locals, didn't sign onto their proposal because of the trusted third party. "We don't think the idea of a trusted third party is necessary," said Lisa Gilbertson, the director of tax and financial issues for the International Mass Retail Association. "Our members, if such a system were thrust upon them, would elect to be their own trusted third party. The majority of our members have presence in almost every state, so they have to collect (sales taxes) nationwide anyway."
     The state and local group also has to combat the battle of incentive, since under the proposal a business's involvement in the system is voluntary. For smaller companies that do not currently collect sales taxes, there may be little motive to do so even though the proposal indicates they would be free from multiple state audits. And while some observers have suggested that states participating in the program could face a backlash from angry businesses, University of Chicago professor Austan Goolsbee, whose research suggests that applying sales taxes to the Internet could significantly reduce the number of online buyers, said that the voluntary compliance would negate that.
     "It's hard to see why (companies) would comply, so if they don't, it's not a deterrent" to locating in a state, Goolsbee said. "The voluntary thing is kind of odd."
- by Stephanie Lash