Posted by kdownie @ 1:54pm GMT
Buying on the Web is nice, isn't it? Unless you live in the same state an e-
commerce site is based in, you don't have to pay sales tax. (Technically, if a
sales tax is not collected, you're supposed to pay use tax, but nobody does.) This
can be very convenient, especially for big purchases, and is certainly one factor
that drives people to shop on the Web. But states are complaining that they're
losing billions of dollars a year in much-needed revenue, and some municipalities
have been forced to levy additional local taxes to pick up the shortfall for public
schools and other government services. The truth is that most e-commerce
companies don't even come close to doing taxes right, and companies that have
been able to skirt state and local sales tax for years will have to start paying the
piper once federal support for the Streamlined Sales Tax Project (SSTP) kicks in.
For most non-catalog brick-and-mortar retailers, charging sales tax is easy
because sales transactions take place at one location. Collecting that revenue,
for the states, is just as easy. Many traditional retailers without an online
presence complain that e-commerce vendors have an unfair advantage by being
allowed to slip through the cracks of the sales tax system, which was clearly not
devised with e-commerce in mind. By contrast, Internet retailers have argued for
years that they should be exempt from charging sales tax because of the
inherent complexity of complying with the different tax rules of every state, not to
mention the more than 7,500 local jurisdictions across the country. Then there's
the problem of commodities being classified differently in different states. Is
orange juice a beverage or a fruit? Is a Milky Way food or candy? What business
could possibly be expected to remain in perfect compliance with such a complex
system?
That excuse would be null and void if the "complexity of compliance" barrier
could be removed, and that's what the Supreme Court told the states back in
1992, before e-commerce was even an issue. In Quill Corp v. North Dakota, the
Supreme Court ruled that the current tax system placed an undue burden on
"remote sellers" – then limited to mail-order catalog retailers – and that if the
states wanted these businesses to collect and remit taxes, they had to come up
with and agree upon a simpler, more uniform system.
Enter the Streamlined Sales Tax Project, a push by a coalition of states that
would -– and most likely will -– radically simplify sales and use taxes in the United
States. Of the states that charge sales tax, only Idaho, Colorado and New
Mexico have not yet pledged to introduce the basic legislation designed to help
SSTP take root. Introduced by the National Governor's Association, SSTP seems
to be the future of sales and use tax. How far into the future is the question.
On April 16 of this year, representatives from 46 states met to discuss the
proposal and introduce amendments. While many issues remain unresolved, it
has long been decided that the taxing jurisdiction that applies to the sale is the
one where the goods are delivered – not where the seller is located, and not the
address of the credit card holder. For e-commerce retailers, this means that soon
you will have to calculate sales tax on-the-fly depending on where each customer
lives, and make sure those taxes are paid to the correct parties. Just how
complex this process will be depends on the extent to which sales tax is actually
"streamlined."
The most sweeping changes SSTP introduces include:
- State level administration of all taxes, even the local share
- Allowing only one state rate and one rate per local jurisdiction
- Establishing a common state and local tax base by 2006
- Eliminating caps and thresholds by 2006, except in the case of sales tax holidays
- Standardized exemption auditing procedures
- Requiring destination-based sourcing on all sales
- Creating and maintaining an updated central database
- Establishing uniform definitions of property classes
True, SSTP won't have any teeth to it until it gets federal backing, but such things
are indeed on the horizon. Starting as early as next year, remote sellers will be
given a choice: Either turn your sales tax administration function over to a
"certified service provider" that is compensated by the states (at no charge to the
merchant), use a "certified automated system" to perform the function in-house,
or build your own technology solution, which must then pass muster with the
collective states.
While it seems like getting 46 states to work together to agree on a common
sales tax system might be an impossible goal, money is the great motivator, and
until a uniform system is devised, states are leaving money on the table. By
some estimates, states are losing a total of $20 billion a year in uncollected sales
and use tax, and that figure is projected to more than double by the end of 2006.
