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A group of tax officials representing 27 states has taken the first step toward drafting a new, simplified sales-tax regime for all retailers -- whether they be online, bricks-and-mortar, or mail-order. The proposal will be unveiled on Sept. 21 at http://www.geocities.com/streamlined2000/.
Backers say the plan could eventually become the framework for a uniform system of taxation for the 46 states that impose such sales levies. It will now be submitted to statehouses across the country for approval. Any state legislature could adopt the plan, whose object is to establish equal treatment for all buyers and merchants, including those in cyberspace. "Our goal is simplification and uniformity," says Charles Collins, the group's co-chair and the director of the Sales & Use Tax Div. of the North Carolina Revenue Dept.
States have been under tremendous pressure to simplify their complex sales-tax rules. A federal moratorium on taxing e-commerce is due to expire next year, and some lawmakers want to extend the freeze to exempt all Internet transactions from sales taxes. At the same time, a decade-old Supreme Court decision limits the ability of a state to require an e-tailer to collect and remit sales taxes if that merchant does not have a physical presence, such as a store or warehouse, in that state. States fear that decision could eventually cost them billions of dollars in uncollected taxes on e-purchases.
The key to whether the proposal flies may be the reaction it elicits from business. So far, the 82-page draft proposal of the Streamlined Sales Tax Project has drawn mixed reviews. "We feel very positive about this," says Lisa Cowell, executive director of the e-Fairness Coalition, a group of real estate developers and retailers pushing for equal tax treatment for customers regardless of whether they do business on Main Street or with online sellers.
But Mark Nebergall, president of the Software Finance & Tax Executive Council, which represents technology and financial companies, questioned the value of the report. "They are working hard, but they are not embracing business as a partner. They haven't demonstrated any ability to pull anything off."
Here are the main proposals:
Tax Sourcing: The panel has proposed a destination-based sales-tax system tied to the location of the buyer. Online sales would be taxed based the buyer's shipping address. For digital goods, the buyer's billing address would apply.
Rates: State and local governments would retain the right to impose their own tax rates. There would be no single rate per state. But the panel recommends that cities and states uniformly limit the frequency of rate changes -- no more than, say, once every fiscal quarter.
Tax Administration: The group would dramatically simplify tax reporting for companies. E-tailers could file a single, uniform return to all tax jurisdictions online. Audits would be simplified as well. Merchants that file through certified third parties would be exempt from most audits.
Exemptions: Under current law, some buyers, such as nonprofits, are exempt from paying sales tax. But merchants are responsible if a buyer misrepresents his tax-exempt status. The panel would put the onus on buyers. So states would directly audit buyers, and not retailers.
What Can Be Taxed: As it stands now, each of the nation's 3,000-plus taxing authorities can define what is taxable any way it wants. So, for example, donuts may be taxable in one city but tax-exempt in the next county. The panel was unable to agree on uniform definitions for goods such as food and clothing that would apply everywhere in the country. Panel staffers say they'll continue to work on these rules in the hope of reaching agreement later this year.
Cost: The group agreed that merchants should not be required to pay the cost of collecting and remitting sales tax. But it has not made a recommendation on how those costs would be paid. This, too, is a thorny issue that eventually will have to be resolved if a uniform system is ever to be implemented nationwide.
Technology: The group has set up a yearlong pilot project with four private vendors of tax software. Merchants could contract with those companies at no cost during the pilot period, the idea being to determine whether sophisticated software can calculate accurate tax amounts and remit them to cities or states. The pilot project -- to begin next year in Wisconsin, Michigan, North Carolina, and Kansas -- should also provide an idea of how much such a system would cost.
The streamlined tax project will hold hearings on its proposals later this month and plans to begin submitting model legislation to states in January. Backers hope the first steps toward a simplified system will be in place by the end of next year.
The proposal is far from the fully simplified tax regime that backers would like to see. But it represents the first serious effort to achieve what states have been unwilling to do for 40 years -- clean up the hodge-podge in their increasingly cluttered sales-tax systems. It's also a signal to congressional supporters that states are willing to try to simplify sales tax regimes in return for the right to collect taxes on online sales.
Whether or not the states succeed will depend on whether business embraces their experiment. In the meantime, the states will have a chance to see if the regime can actually work.
By Howard Gleckman in Washington Edited by Douglas Harbrecht
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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