States Press for Federal Sales and Use Tax Agreement

Published February 1, 2009

Given the recent economic turmoil that has left many state budgets in the red, some government officials are looking for ways to raise revenue without being seen as tax hikers.

Those policymakers have taken an interest in the federal Sales Tax Fairness and Simplification Act, introduced as H.R. 3396 and S. 34 in the U.S. House of Representatives and Senate, respectively, during the 110th Congress, which ends in January.

The legislation, likely to be reintroduced early in the 111th Congress, would force online retailers, catalog merchandisers, and certain other businesses to collect and remit sales taxes to numerous states in which the businesses have no physical presence.

Sen. Mike Enzi (R-WY), who introduced S. 34, said, “If Congress continues to allow remote sales taxes to go uncollected, and electronic commerce continues to grow as predicted, other taxes, such as income or property taxes, will have to be increased to offset the lost revenue to state and local governments. I just want to avoid that.”

Actually, there is little agreement about how much revenue state and local governments may lose through uncollected remote sales taxes. The disagreements revolve around factors including conflicting estimates about the future growth of electronic commerce and the importance of online “business-to-business” transactions that are largely already subject to taxes under current laws.

Court Blocked Requirement

Congress’s authorization is needed to more aggressively pursue revenues from consumer purchases because the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota (1992) affirmed states could not require remote vendors to collect sales taxes.

The United States has more than 7,000 sales tax jurisdictions, and the court determined requiring sellers to collect and remit all applicable taxes to each buyer’s state and locale would dramatically limit interstate commerce.

In response, various states and nongovernment entities developed the Streamlined Sales and Use Tax Agreement (SSUTA) of 2002, which they say will capture an opportunity for higher tax revenues, address interstate sales tax complexity, and create a more level tax playing field between “bricks and mortar” firms and remote sellers.

When a state conforms to SSUTA, it alters its tax code to reflect standard definitions in the agreement. Currently, 22 states have changed or are changing laws to reflect the agreement’s provisions. States that have fully complied earn membership on the Streamlined Sales Tax Governing Board (SSTGB).

Remote vendor cooperation with the agreement is voluntary. However, were a new version of S. 34 or H.R. 3396 to pass, members of the board would have Congress’s mandate to compel remote vendors to collect and remit sales taxes.

Law Could Force Collections

According to Jerry Cerasale, senior vice president of government affairs for the Direct Marketing Association (DMA), the proposed federal legislation creates an unjust “mechanism to force companies to become unpaid tax collectors for the state when they receive none of the benefits that resident companies of the states receive.”

Last fall the SSTGB considered changing the proposed tax regime to allow for origin-based as well as destination-based taxation, but the change would present another litany of compliance problems for large and small businesses alike. Tracking buyers’ origins entails costly measures such as restructuring accounting practices and incorporating new software methodology. And once those changes have been made, companies would still face the burden of audits from individual states’ taxing authorities.

The Sales Tax Fairness and Simplification Act exempted “small businesses” from the authority of member states, but that exemption may disappear in the future because some SSTGB members believe technological advances will mitigate the burden of collection.

Until 2007 the SSTGB had no official position on Congress’s Sales Tax Fairness and Simplification Act, according to the board’s executive director, Scott Peterson. Now, he said, SSTGB “is on record supporting Congressional action to approve the concepts expressed in H.R. 3396 or S. 34,” and presumably their legislative successors in the 111th Congress.

Budget Pressures Build

Peterson said he hopes the legislation will pass in 2009, as there will be more “pressure because of the fiscal situation in which states find themselves.” With states and localities asking the federal government for financial handouts, the legislation might appeal to Congress as a way of aiding states without dipping into federal funds, he said.

Before embracing this as a solution, however, taxpayer advocacy groups say officials should recognize statistics about how much revenue SSUTA would raise vary widely. According to DMA projections, state and local governments may have lost out on $5.4 billion of remote sales tax revenue in 2008, but that is just a fraction of a percentage point compared with the more than $2 trillion they collected overall.

‘Interstate Collusion’

Moreover, as National Taxpayers Union’s Director of Government Affairs Kristina Rasmussen noted in Congressional testimony late last year, it seems likely the disadvantages of lower interstate tax competition, higher burdens on remote sellers, and higher prices paid by consumers would outweigh the benefits of any revenue increase for state governments.

“[T]he SSUTA battle is not being fought over the small share of retail sales that are not subject to direct purchase taxes,” Rasmussen noted in her testimony. “[T]he ultimate objective is to dramatically increase sales tax rates and their reach through interstate collusion, and put a padlock on the ‘laboratory of the states.'”

Doug El Sanadi ([email protected]) is state policy analyst for the National Taxpayers Union Foundation, the research and educational arm of the 362,000-member National Taxpayers Union.