Congress Holds Quill's Future
States took one step closer to being able to collect taxes on sales that occur via the Internet, telephone or catalog when 18 states were admitted this month as full or associate members of the Streamlined Sales and Use Tax Agreement's governing board.
The vote, at a meeting of the Streamlined Sales Tax Project in Chicago on June 30 and July 1, means that as of Oct. 1, retailers may voluntarily agree to collect taxes for remote sales originating in any of the 12 states that are full members. However, congressional action is needed before qualifying states could mandate collection of this tax.
DM experts and online merchants said last week that it is too soon to tell whether retailers will opt in to the voluntary program. Rich Prem, director of global indirect taxes for Seattle-based Amazon.com, said that the project has made great progress, but important issues remain before the online retailer volunteers to collect tax, and before it thinks Congress should mandate remote sellers to do so. Amazon has participated in the project since spring 2000.
The states' plan, he said, lacks a meaningful mechanism to compensate large Internet retailers for the costs of collecting and remitting sales taxes.
"The [agreement] would only pay compensation if you used a certified service provider for tax collection, but this isn't very practical for a very large retailer," he said.
Remote sellers might not volunteer to collect taxes, but they should keep an eye on the program because "this will give an impetus to push federal legislation," Prem said.
Prem said remote sellers also should watch to ensure that any congressional legislation includes "real simplification, real vendor compensation, and the bar is higher than has been achieved by the project ... When you mandate that everyone has to collect, the bar should be pretty high."
Such bills failed in 2000 and 2003. Streamlined Sales Tax Project officials say supporters in Congress will reintroduce a measure this year, but it's unclear whether it is a priority.
Mark Micali, vice president of government affairs at the Direct Marketing Association in Washington, said that a federal bill to make the SSUTA mandatory might be introduced "after the July 4th recess, but we've heard nothing definite along those lines." Congress returns from recess July 11.
The states' action "doesn't really change the political dynamic in Washington on this issue," he said. "It is most unlikely Congress would adopt mandatory sales tax legislation in this two-year Congress ... Quill is still the law of the land. And until the Congress, under the interstate commerce clause, were to grant the states this authority to require sales tax collection where there is no nexus or presence in a state, the status quo continues."
The Streamlined Sales Tax Project seeks to establish common sales tax rules and collection methods across states. Online and catalog businesses aren't required to collect sales tax in states where they have no physical presence, according to a 1992 U.S. Supreme Court ruling. That ruling, Quill v. North Dakota, held that it would be too burdensome on businesses if they were required to collect and remit sales taxes on behalf of the 7,600 state and local taxing jurisdictions nationwide.
By showing that tax collection represents no substantial burden to businesses, the SSTP hopes to spur federal legislation allowing states that simplified their methods to mandate tax collection from retailers that have no physical presence in their state. The Streamlined Sales and Use Tax Agreement, created in 2002 by the SSTP, represents the framework among states for cooperative administration of certain sales and use tax functions. It contains provisions that simplify, increase uniformity and provide for more technology solutions. A state's participation in the SSUTA is voluntary.
"The legislation that will be proposed will refer to the [SSUTA] and say that only those states that have enacted that conforming legislation would be allowed to require collection of the tax," said Diane L. Hardt, tax administrator for the Wisconsin Department of Revenue and SSTP co-chairwoman.
The states with full membership are Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, Oklahoma, South Dakota and West Virginia. Associate members are Arkansas, Ohio, North Dakota, Tennessee, Utah and Wyoming. Full members conformed their tax laws to the SSUTA. Associate members' tax codes are not in full compliance yet.
Under the SSUTA, the system could not take effect until at least 10 states making up 20 percent of the total population of states with sales tax were in substantial compliance with the agreement. The 18 states on the governing board represent 25.3 percent of the population of states that levy sales taxes.
The agreement takes effect Oct. 1. Retailers then can register and begin collecting taxes on remote transactions using the simplified system, Hardt said. Software vendors contracted by the SSTP will provide free tax collection and remittance software and services to these retailers. Without a governing board, these states would be unable to contract with the technology companies.
Retailers that voluntarily agree to collect taxes would do so for remote sales originating in any of the 12 full-member states. As an incentive, the states will offer an amnesty for e-commerce companies that owe taxes on past online sales to any participating state.
However, Micali said that the SSUTA "does not provide significant simplification of the tax collection process. It's no reduction in the 7,600 various tax rates ... and there is no true uniformity of definitions to how products should be treated from state to state."
For example, Micali said Nike tennis shoes are considered clothing in some states and often are tax exempt but are athletic gear in other states and often taxed.
Though avoiding the back-tax liability may be an incentive for some companies to opt in, "I don't see an enormous or significant advantage to a company to collect under this regime because it is not really that simple," Micali said. "Therefore, my instincts are that not that many companies will voluntarily step forward to opt in to this. However, it is too early to say that with certainty."
Melissa Campanelli covers postal news, CRM and database marketing for DM News and DMNews.com. To keep up with the latest developments in these areas, subscribe to our daily and weekly e-mail newsletters by visiting www.dmnews.com/newsletters