The national Streamlined Sales Tax Project (SSTP) which officially began in March 2000 is about to take effect in a significant way. SSTP is an effort to simplify and modernize sales and use tax collection and administration, according to James V. Olsen, President of the Utah Retail Merchants Association and Utah’s business representative on SSTP. In the beginning, only about half of the states seemed interested, but now, 43 of the 45 states which impose a sales and use tax are participating. The only states with a sales and use tax which have not participated are Colorado and Idaho.
Mr. Olsen explained that the goal of SSTP is to provide states with an improved sales tax system that includes the following key features:
• Uniform definitions within tax laws
• Rate simplification
• State level tax administration of all state and local
sales and use taxes
• Uniform sourcing rules
• Simplified exemption administration for use and entity based exemptions
• Uniform audit procedures
• State funding of the system
On November 12, 2002, thirty states and the District of Columbia approved an agreement. The agreement was not model legislation but a set of standards that states wishing to participate in the project would have to meet. This would require states to amend or modify their sales and use tax laws to achieve the simplifications and uniformity required by the participating states working together.
The Agreement becomes effective once a minimum of 10 states representing 20 percent of the nation’s population meet the compliance requirements of the Agreement. That standard was met and verified on July 1, 2005.
Results from Five Years of Work
Now that the Agreement is in effect the next major step will take place on October 1, 2005 with the creation of a governing board compromised of representatives of each of the 18 participating states. The Governing Board will be comprised of representatives of each member state which has met the requirements of the Agreement. Each member state is entitled to one vote on the Governing Board. The Governing Board is responsible for interpretations of the Agreement, amendments to the Agreement, and issue resolution.
Mr. Olson explained that there are three categories of 18 member states on the Governing Board. Full member states are currently in compliance with the Agreement’s requirements and may vote on amendments to or interpretations of the Agreement. These states include Indiana, Iowa, Kansas, Kentucky, Michigan Minnesota, Nebraska, North Carolina, Oklahoma, South Dakota and West Virginia. The second category is associate member states that will be in compliance with the Agreement, once currently enacted legislation takes effect. These states include New Jersey, North Dakota, Ohio, Tennessee, and Utah. These states will automatically become full members on the effective dates of their legislation (Utah’s effective date is July 1, 2006 unless the legislature determines that certified software is available before then to assist vendors in complying with the Agreement).
The third category are also associate members and are in compliance with the Agreement when taken as a whole, but not necessarily with each provision. These states must successfully repetition for full membership prior to January 1, 2008, or forfeit their membership. States in this third category include Arkansas and Wyoming.
Twenty-four other states have enacted legislation authorizing them to enter into the Agreement, and are designated SST Implementing States. However, they have not yet enacted the conforming legislation necessary to make them members of the Agreement and give them a seat on the Board.
A State and Local Government Advisory Council and a Business and Taxpayer Advisory Council from the private sector will advise the Governing Board.
Simplification for Customers, Retailers and Administrators
The sales tax system in the United States is extremely complicated, Mr. Olsen said, and this part of the reason for SSTP. Rates vary widely from one jurisdiction to another. Items that are taxable in one state aren’t taxable in the next. State laws don’t even agree on definitions like “food” or “clothing”. And it’s not just states that collect sales taxes — more than 7,000 local jurisdictions or taxing entities have their own rates, definitions and rules. This is a nightmare for retailers doing business in multiple locations. Customers don’t understand and many times blame the retailer for the different rates, or ways the taxes are administered and collected when they travel outside their normal shopping area. So when individuals ask me why the retail community would support the Streamlined Sales Tax Project, the answer is simple. The project will make life in general easier for private businesses, and tax administrators! The project will reduce, but not eliminate the expense and burden of complying with this complicated matrix of conflicting laws and regulations.
Simplification is also the first step towards a level playing field for retailers. Mr. Olsen pointed out that Mail-order, Internet and other remote sellers don’t have to collect sales tax from most out-of-state customers under current law, and the complexity of the sales tax systems has been the main reason the U.S. Supreme Court has ruled that businesses with no physical presents in a state are not required to collect the sales tax for that state. That doesn’t mean the taxes are not due on these sales, he cautioned. The tax is still levied on the sale, but it then becomes the responsibility of the purchaser to pay the tax when they file their income tax return each year. The problem becomes one of enforcement. How heavy handed and intrusive do we want the tax commission to be in our private lives? People will not tolerate the tax commission coming in and looking at all their credit card or checking account statements to see if the person purchased any goods from remote sellers. But, we believe once the sales tax system is simplified Congress will then apply the same rules to all sellers, whether they sell their merchandise from a brick-and-mortar store, over the phone, through a catalog or on the Internet.
The Utah Taxpayers Association has supported the efforts of SSTP in providing equity among in-state and out-of-state retailers. However, the Association is concerned about the potential for tax increases resulting from achieving equity. To prevent Utah’s participation in SSTP from becoming a tax increase, the Utah legislature now requires that the new sales taxes from out-of-state purchases by Utah taxpayers will be placed in escrow and not go directly into state spending. This is intended to enable the legislature to utilize the new funds to cut taxes in other areas.