States working toward uniform sales tax laws
Streamlining Sales Taxes
Texas loses nearly $400 million in annual revenue from uncollected sales taxes on Internet and mail order sales, according to Eleanor Kim, the Comptroller's assistant director of Tax Administration.
"Texas retailers also believe they are at a distinct tax disadvantage," Kim said. "State law requires them to collect the sales tax, which makes their prices appear higher than their out-of-state competitors."
Texas businesses aren't alone. No state can tax these sales because a 1992 U.S. Supreme Court decision (Quill v. North Dakota) prohibits taxing interstate transactions. The court said state sales taxes were so irregular that complying with them was an unreasonable burden on interstate commerce.
The court also ruled that states couldn't require companies physically located elsewhere to collect taxes unless Congress required it. The court also said states must make it easier for businesses to comply with sales tax laws.
Keep it simple
To make taxes simpler and to recoup this lost revenue, 36 states and the District of Columbia joined in March 2000 to form the Streamlined Sales Tax Project. The goal was to reduce inconsistencies in state laws and create one uniform system for administering and collecting sales taxes.
In November 2002, the project produced the Streamlined Sales Tax Agreement, which outlines a simplified sales tax system for multi-state retailers. By July 2003, 17 states had agreed to abide by the agreement, which has been introduced in six other state legislatures. Texas is one of three states that agreed to portions of the agreement.
"The Streamlined Sales Tax Project shows what the states can do when they work together," said Billy Hamilton, Texas' deputy comptroller and a member of the project's governing board. "If we accomplish nothing else, we will have made our tax systems easier and less burdensome for taxpayers nationwide."
Compromise the answer
Kim, a member of the Streamlined Sales Tax Project's steering committee, said the agreement calls for states to require sales taxes imposed by local governments to be collected and given not to the jurisdiction in which the sale took place, but the jurisdiction where the product or service was delivered.
This provision affects city and county governments that levy a local sales tax in addition to Texas' 6.25 percent statewide sales tax. For example, if a store sells a lawnmower in Dallas, but delivers it to Arlington, the agreement says the city of Arlington should receive the local sales tax, not Dallas.
The Texas Comptroller's office recommended several changes in state law to the 2003 Legislature to help Texas comply with the agreement. The Legislature enacted some technical changes, which will become law in October 2003, but one change affecting local governments became the subject of a compromise that takes effect in July 2004.
That compromise divides sales taxes into two categories: taxes on products and taxes on services. The compromise says the ultimate recipient of sales tax on services is the city or county where the service is performed, as called for in the agreement. But the sales tax on products goes to the city or county where the sale took place.
"Whether the project participants consider Texas in full compliance with the agreement is still up in the air," Kim said.
Officials from several Texas communities fought the change because communities with large manufacturing plants or furniture stores in their areas stood to lose considerable sales tax revenue if the law was changed, she said.
A fluid situation
The number of states that enact legislation complying with the agreement is important because the agreement says if 10 states comprising at least 20 percent of the total population of states with a sales tax approve the agreement, it becomes binding and goes into effect.
By September 2003, representatives from participating states had determined the agreement's population requirement had been met. The various state laws have different effective dates, however, so the member states have not yet decided when the interstate agreement will become operational.
"Until they decide and the agreement is signed by the eligible states, it is uncertain when multi-state retailers may voluntarily collect sales taxes or when it will become viable for the project to ask Congress to require interstate businesses to collect sales taxes on all Internet and mail order sales," Kim said.
"Internet companies and mail-order firms don't outright oppose mandatory sales tax collection but believe that there is additional work to be done and additional simplification that is necessary to eliminate administrative burdens before Congressional action is warranted," said Rich Prem, director of Global Indirect Taxes at Amazon.com.
"The situation is still fluid, and there are several factors affecting whether the agreement is binding on the participating states," Hamilton said. "So there are still some kinks to work out."
Additional information on the Streamlined Sales Tax Project is available at www.streamlinedsalestax.org.