Marketers and states are headed for a showdown later this year, with states looking to fill their depleted coffers and marketers still saying it is too difficult to keep track of the thousands of state and local tax rates.
The Streamlined Sales Tax Project, consisting of about 40 states, continues its efforts to implement a simplified sales tax system that could require companies to collect sales taxes from all customers.
Currently, only sellers with a physical presence, or “nexus,” in the same state as the buyer are required to collect taxes, according to a 1992 Supreme Court ruling, because the thousands of tax jurisdictions nationwide are too burdensome to keep track of.
In November, members of the tax initiative approved the Streamlined Sales and Use Tax Agreement. Though municipalities still would be able to set individual tax rates, the agreement sets a framework that, the states say, would make the collection of sales tax manageable. The agreement would apply to all sales channels: retail, telephone, Internet or mail order.
“States are right now putting together legislation” based on the agreement, said Diane L. Hardt, SSTP co-chair and administrator, income, sales, and excise tax, Wisconsin Department of Revenue.
Hardt said Idaho's legislature was the first to explore the simplified tax system with a hearing this month.
The agreement seeks as much common ground as possible on how the states handle sales taxes. For example, it restricts how and when states and municipalities can change their tax rates and requires states to maintain a database that would assign five-digit and nine-digit ZIP codes to each of the state's tax rates and jurisdictions. It also calls for participating sellers to receive a percentage of collected sales taxes and other unspecified funds for 24 months to help with their implementation costs.
Once 10 participating states making up at least 20 percent of the population of all states in the project enact legislation, the SSTP plans to work with Congress to craft legislation that would not be in violation of the 1992 Supreme Court decision.
The movement also has the backing of the National Governors Association and the U.S. Conference of Mayors. A report in the Detroit News last week said Sen. Byron Dorgan, D-ND, and other members of Congress are considering legislation this year that would mandate the collection of sales tax on Internet sales.
Marc Micali, vice president, government affairs at the Direct Marketing Association, said DMers need to watch Congress closely.
“The real battle is what will happen in Congress,” he said. “They are the ones with the authority to make any sweeping legislation in regards to remote-sales tax collection.”
Direct marketers concede that the Streamlined Sales Tax Agreement simplifies some issues but say it still has several holes.
“We applaud anything to make the sales tax system simpler,” said Rich Prem, director of global indirect tax at Amazon. “But the agreement doesn't make it simple enough to address a lot of the e-commerce, Internet tax concerns we have.
“We have a lot of promotions where if someone buys a 'Harry Potter' hardcover book, we'll throw in a 'Harry Potter' e-book for free. However, in some states, 'Harry Potter' the physical book is subject to tax, but 'Harry Potter' the e-book is a service, so it is not something that would be taxed. E-commerce is a new animal, and you'd have to radically change the system to deal with things like digital downloads.”
DMA spokesman Lou Mastria said the agreement has three changes that are “modest [improvements] at best”:
· Standardizing the rounding rule instead of allowing multiple rounding rules.
· Allowing one tax filing return per state instead of having to file at each individual jurisdiction.
· Requiring 60-day notice for changes to the tax rate or tax law and limiting changes to the first day of a quarter.
“In the scheme of things, however, these are small in terms of the bigger picture of achieving some level of simplification,” Mastria said. “This sort of scratches the surface.”
Another trouble spot is sales tax holidays, where states mandate that certain products aren't subject to sales tax at various times of the year.
“Those are difficult to administer for a retailer who has registers and clerks, but it is almost impossible for someone like Amazon.com to do because we wouldn't know when to tax that person,” Prem said. “Do we not charge them sales tax if a customer orders [during] the tax-free days? Or do we not charge them if their product is delivered during the tax-free days? It becomes very random.”
The agreement sets several requirements for states in implementing such tax holidays, including at least 60 days notice of the holiday period. It also says that the governing board will establish procedures on some of the issues Prem raises, such as the treatment of rain checks and back orders.