What Streamlined Sales Tax Means For E-Commerce (link to article)
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.
