Initially spurred by the need to create a uniform method for Internet and multi-state retailers to collect sales tax on out-of-state transactions, the National Governors Association’s Streamlined Sales Tax Project (SSTP) has taken on new urgency in light of the fiscal difficulties currently faced by many states.
“States need to protect their revenue sources in order to protect their sovereignty. This is not just an Internet sales tax. This is a very significant initiative that addresses both the inter-state and global nature of commerce” said R. Bruce Johnson, a Utah State Tax commissioner and national co-chair of the Streamlined Sales Tax Implementing States.
“Simplification is the right thing to do, because we have created a tremendous burden for multi-state retailers,” he said.
The nation’s existing sales tax system encompasses some 7,500 tax jurisdictions, with levies often imposed at both state and local levels in 45 states. Alaska, Delaware, Montana, New Hampshire and Oregon do not have a sales tax.
Multi-state efforts to streamline the current system began with a 1992 U.S. Supreme Court decision that forbids states from forcing retailers to collect sales taxes unless the seller has a physical presence in the state where the purchase is made. The Court ruled that the complexity of collecting taxes across thousands of jurisdictions presents too large a burden for online retailers, but left the door open for states to seek mandatory collection of online sales taxes if they first simplify the existing sales tax structure.
“The whole nature of retailing in the U.S. has fundamentally changed, and the 7,500 systems we have now were drafted for a horse and buggy age,” said Frank Shafroth, director of state/federal relations for the National Governors Association. “This is an effort to craft a sales and use tax system for the twenty first century.”
Representatives of 30 states approved the SSTP proposal for a streamlined tax at a meeting in Chicago in November, setting the stage for a series of debates in state legislatures throughout 2003. At least 10 states representing 20 percent of the U.S. population will have to amend their existing laws to meet the projects self-imposed threshold for implementing the program on a voluntary basis in the participating states.
With the voluntary system in place, the states would then be likely to petition the U.S. Congress to the make the changes mandatory.
“I hope we’ll reach the threshold by January 1, 2004,”said Johnson. “Then we can go to Congress and ask them to require any vendor selling into one of the [participating] states to collect sales tax on behalf of that state.”
Besides the Supreme Court rulings and a previous reluctance on the part of Congress to legislate sales taxes, the SSTP pact is also likely to face opposition from county, city and local officials in many states.
“The intent of a streamlined tax is to supersede county, city and local taxes,” said Michael D. Black, an attorney with Parr Waddoups Brown Gee & Loveless (Salt Lake City, Utah) who has conducted substantial research in the area of Internet taxation. “If the states obtain jurisdiction to apply taxes, numerous questions will undoubtedly arise about the interpretation and effect of those taxes. Each state court would have its say as to the interpretation and effect of that states laws. Those interpretations will almost certainly vary substantially from state to state.”
Depending upon the current tax environment in each locality, the effects of a fully implemented SSTP will impact municipalities and taxpayers along a continuum from a windfall to economic devastation, Black said.
Recognizing that the streamlined system could pose severe limitations on local economies, the implementing states have left some room for compromise.
“We have retained the right of local governments to impose sales taxes at their own rates, but we have put limits on them,” said Johnson, noting that the SSTP proposal mandates that a local jurisdiction could only tax the same items that are taxable by the state, must maintain the same exemptions, and must allow the state to collect its tax through a single collection point — thereby allowing a retailer to make a single return.
“Many states are being asked to make very significant changes, but the states wouldnt have the political will to change the system if they didnt think there were substantial amounts of revenue out there to collect,” Johnson said.
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