2003, Volume 06, Issue 1
The Virtual World's Wild Frontier Is Changing
SSTS is designed to turn e-businesses into tax collectors.
States and municipalities have long been concerned about the loss of sales tax revenue when people buy goods on the Internet instead of from a local store. According to a University of Tennessee study, the loss in revenue to the states is currently more than $13 billion annually and is projected to reach $45 billion or more by 2006. Moreover, bricks-and-mortar merchants have long complained that they are at an unfair disadvantage because they have to collect sales taxes while e-businesses usually do not do so.
Contrary to many people's perception, there is no law prohibiting states from collecting sales or use taxes on goods sold over the Internet; it is just extraordinarily difficult. (There is currently a moratorium on taxing access to the Internet which will sunset in October 2003 unless it is renewed by Congress. But buyers are not legally exempt from sales or use taxes.) For the most part, e-businesses have not collected sales taxes on goods sold, and most people are not even aware that they are legally supposed to report and pay a "use tax" if the sales tax is not collected.
The difficulty states have had in collecting these taxes is both technical and political/legal. Which jurisdiction's taxes apply? The state where the seller is located? Where the buyer is located? Or maybe where the holder of the credit card lives? Even if that is settled, how can businesses be expected to determine the correct tax to be collected when there are more than 7,500 taxing jurisdictions with different definitions of taxable goods and different tax rates? And how can businesses be expected to keep up with 7,500 plus regulations about remittance? In 1992 the Supreme Court said businesses should not be expected to deal with that much complexity. If the states and municipalities want businesses to collect and remit that money, they need to create a simpler system.
To address these issues, the National Governor's Association (NGA) initiated the Streamlined Sales Tax Project. The model agreement has determined that the taxing jurisdiction will be the one where the goods are delivered. (There are still unresolved questions about downloaded software among other things.) Of greater importance, the model agreement requires states that want to participate to simplify and standardize elements of their state tax systems so that the assessment and collection of sales taxes by remote sellers could be automated and administered with a minimum of effort and cost. While not all issues have been resolved, the framework for negotiation is in place.
In November of 2002 delegates from 32 states approved the model agreement. It will become operational when 10 states have passed laws to conform their tax system to the agreement. That is predicted to happen in 2003.
At this point, participation will be voluntary for both states and sellers. However, legislation has been introduced in Congress that would extend the moratorium on taxing access to the Internet while allowing states that simplify their state tax codes to require collection of taxes on sales by remote sellers, including both Internet and catalog sales. Any legislation will undoubtedly be modified before it is passed, but the discussion is taking place.
The SSTS provides sellers with the opportunity to use one of three technology models to determine and remit sales taxes to the appropriate jurisdictions. In Model 1, a certified service provider that is compensated by the states performs the seller's sales tax functions. In Model 2, a seller uses a certified automated system to perform the tax calculation function. Model 3 allows a larger seller to develop its own proprietary sales tax software and have this system certified by the states collectively.
By agreeing to participate in the SSTS, businesses could realize savings in administrative costs and other areas compared with trying to work within the current system. Some national retailers have indicated that the savings could reach several millions of dollars per year. In order to benefit, businesses must take the time to learn the specifics, participate, and be sure they have the appropriate systems in place to take advantage of the simplifications in the SSTS. Participating in the system could also result in reduced burdens of litigation and other costs relating to audits and administration.
While SSTS's impact is still relatively uncertain, one thing is clear. The classic adage associated with two basic certainties, death and taxes, remains true even for e-commerce. Even 'virtual' businesses must now think carefully and strategically about the physical world in which at some point they do exist, even if it is only when goods are delivered.
You will find a discussion of many of the basic issues about taxation of Internet sales in a two-part article in the Graziadio Business Report entitled "E-commerce and Taxation." Although these articles were written in 1999, the fundamental questions remain much the same.
http://gbr.pepperdine.edu/992/ecommerce.html
http://gbr.pepperdine.edu/993/ecommerce2.html
You can find specific information on the Streamlined Sales Tax Project on the following websites.
The Streamlined Sales Tax Project, The National Governors' Association
Streamlined Sales Tax System for the 21st Century
Streamlined Sales Tax Project at E-commerceTax.com
Sales Tax Tools
Summary of the Streamlined Sales Tax initiative
The Streamlined Sales Tax Project (SSTP) Proposal - Overview and Analysis
Institute for State Studies: E-commerce sales tax revenue losses
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