Streamlining the Sales Tax System
Governor Michael 0. Leavitt
Utah State Bar Tax Section April 25, 2001
I. Constitutional Background.
A. National Bellas Hess v. Dept of Revenue, 386 U.S. 753 (1967).
1. Facts. National Bellas Hess was a mail order retailer.
It sent catalogues into Illinois, but had no offices or salespeople there.
Customers would order goods by phone or mail, the orders would be accepted
by NBH at its headquarter in Missouri. The goods would then be sent to
Illinois by common carrier. Illinois argued that NBH was effectively doing
business in Illinois and should be required to collect its sales tax.
2. Holding. The Supreme Court disagreed, holding that
to impose such a burden on a company without physical presence in the
state was (1) a violation of the Due Process clause of the Constitution
(i.e., it was not fair to place such a requirement on a business without
nexus with the state) and (2) a violation of the Commerce Clause because
it would be a tremendous burden on an interstate seller to collect sales
taxes for every jurisdiction to which it sent goods.
B. Quill Corp v. North Dakota, 504 U.S. 298 (1992).
1. Facts. Quill was a mail order retailer headquartered
in Illinois. It sent catalogues into North Dakota. Otherwise, the facts
are very similar to National Bellas Hess. North Dakota felt that the time
was ripe to try to get National Bellas Hess overturned. Recent decisions
of the Court had lowered the nexus standard for due process. Furthermore,
the advent of computers made it much easier for a sophisticated seller
like Quill to keep track of sales taxes for several jurisdictions.
2. Holding. The Supreme Court agreed in part. It held
that because Quill was purposely exploiting the North Dakota market it
had sufficient nexus with North Dakota that a collection requirement would
not violate the Due Process Clause. In other words, it was fair to require
Quill to collect the tax. However, the Court held that the collection
obligation still violated the Commerce Clause, i.e., it was still too
great a burden on interstate commerce to require a seller, without physical
presence in the state, to collect the state's taxes.
3. Deference to Congress. Neither the states nor Congress
can permit a violation of the Due Process Clause. Commerce Clause matters,
however, are within Congress' discretion. By overturning the "due
process" holding of National Bellas Hess and by basing its decision
in Quill solely on the Commerce Clause, the Court made it clear that Congress
could allow such a collection obligation. Thus, the Court was effectively
saying: "this is a difficult issue that Congress should resolve."
II. Advisory Commission on Electronic Commerce (11ACEC11).
A. Background. Most observers believe that the same
standards that. govem mail order retailers should also govern Internet
retailers. With the advent of "etailing" the states became concerned
that their sales and use tax bases would be eroded to a significant extent.
Some economists were predicting the demise of Main Street businesses.
Internet companies, on the other hand, were afraid that they would be
viewed as a rich new source of revenue for the states. Accordingly, they
convinced Congress to pass the Internet Tax Freedom Act.
B. The Internet Tax Freedom Act. The Internet Tax Freedom
Act, enacted in 1999, imposed a 5year moratorium on new state and local
taxes on the Internet. Contrary to a popular misconception, however, it
did not limit existing sales and use taxes. The Act also created the Advisory
Commission on Electronic Commerce ("the ACEC") which was to
prepare a report to Congress on the best way to approach taxation of electronic
commerce.
C. Composition of the Commission. The Commission was
comprised of representatives from the states, including Governors Leavitt
of Utah, Locke of Washington and Gilmore of Virginia, from local government,
from the federal goveniment, and from large intemet businesses, including
AT&T, AOL, Gateway and Charles Schwab. Conspicuous by their absence
were any representatives from traditional Main Street retailers.
D. Result. Unfortunately, but not surprisingly, the
Commission deadlocked and was unable to issue a report with the required
twothirds vote majority. Nevertheless, the ACEC was very successful in
raising peoples' awareness of the issues involved. Many valuable proposals
were aired, including one by the National Govemors Association, then headed
by Governor Leavitt. That proposal recognized the tremendous burden that
is placed on all retailers by the complexity of current sales tax laws
and proposed a "zeroburden system" where the states would voluntarily
simplify and coordinate their systems and authorize "trusted third
parties" to perform collection obligations on behalf of the retailers
at no or minimal cost to the retailers. This plan, though not accepted
by the required supermajority of the ACEC, was warmly received by the
states and by traditional retailers and formed the basis of the Streamlined
Sales Tax System now being developed.
III. Streamlined Sale Tax System ("SST").
A. In general. The SSTS is a group of some thirty member
states, with additional observer states, who are committed to simplifying
their sales taxes. Their immediate goal is to make sales tax compliance
easier and less costly for all retailers, especially retailers who do
business in several jurisdictions. Their hope is that many interstate
sellers will be induced to voluntarily collect sales taxes on behalf of
state and local governments. Eventually they hope the system will prove
successful enough that Congress will require large retailers to collect
taxes on behalf of all the participating states, even if that retailer
does not have a physical presence in those states.
B. Business plans. The system envisions four separate
business plans. Each participating retailer can choose the plan that is
best for it.
1. Certified provider. Under this plan, the retailer
contracts with a certified provider who collects and remits taxes on behalf
of the retailer. The provider, will be certified by the states, so the
retailer will have no audit risk. If errorsintaxation, collection or remittance
are made, it will be a matter for the certified provider and the states
to work out.
2. Certified system. Under this plan, a retailer can
purchase a certified compliance software package. That package will also
be certified by the states. It will allow a retailer to code its inventory
in such a way that it will know which items are subject to tax in which
states. It will also contain the appropriate tax rates for all participating
jurisdictions. If the retailer properly uses the software, it will have
not audit exposure for any errors in the software.
3. Certified proprietary systems. This plan will be
limited to large retailers. If they have a requisite volume of sales and
are doing business in the requisite number of jurisdictions, the states
jointly will audit that retailer's proprietary tax compliance software
and certify it. Once the software is certified, the retailer will not
have retroactive liability for failure to collect taxes caused by errors
in the software.
4. Current system. Any retailer that chooses not to
use a certified provider or certified software can still participate in
the system by voluntarily computing its own collection obligations and
submitting its own returns.
C. Exemption processing. One of the greatest breakthroughs
of the System, and one that will immediately benefit all retailers in
a participating state, is relaxation of the good faith standard for exemption
certificates. A retailer will no longer be liable for exemptions erroneously
claimed by its customers as long as the retailer retains data on the type
of sale, the exemption claimed and the identity of the purchaser. If a
buyer is not entitled to a claimed exemption, the states will work it
out with the buyer. The retailer will not be liable in any way.
D. Uniform sourcing. The System is developing uniform
sourcing rules so that no two participating jurisdictions will claim the
right to tax the same sale. Those rules will also allow the retailer to
determine the appropriate jurisdiction in situations where it does not
have a delivery address, or where the delivery address is the address
of a donee, not the purchaser.
E. Tax Base.
1. Single state wide base. Each participating states
will be required to have a single tax base applicable to that state and
all its political subdivisions.
2. Common definitions. Although the System will not
mandate a particular tax base for a state, certain productbased exemptions
will be commonly defined. Thus, if a state chooses to exempt food, it
must define "food" the same way all the other participating
states define "food." For example, if a Twix bar is "food"
in Texas, it will also be "food" in New York.
If Snapple is a soft drink in North Carolina, and thus not "food"
it will also be a soft drink in Pennsylvania. The state will also use
a common definition for "bad debts," "purchase price"
and similar compliance terms.
3. Use based exemptions. The states will continue to
have wide latitude to exempt products based on use. Thus, Utah's manufacturing
exemption can continue to differ from Ohio's manufacturing exemption,
because all the retailer must do in either state is get an exemption certificate
from the manufacturer.
F. Tax Rates
1. Local option rates are still allowed. Local governments
will still be allowed to have their own tax rates, although their tax
bases must conform to the state's base. A volunteer retailer will be in
compliance as long as it collects the appropriate rate for the ninedigit
Zip Code area. The states will provide a database that will have the appropriate
rate for each such area. In those cases where two or more rates occur
in a single ninedigit area, the retailer must collect only the lowest
rate.
2. Limitation on local rate changes. The system will
also limit rate changes for local governments to the first day of a calendar
quarter on 60 days notice to the retailers (A stricter limitation already
exists in Utah law.)
G. Timing. The Multistate Agreement has been substantially
drafted and model legislation has been prepared. Additional work will
be necessary to determine what kind of compensation must be allowed to
retailers and certified providers. Some of those costs will not be known
until the contracting process is undertaken. Nevertheless, it is hoped
that several states will get legislative authorization to participate
in the system this year. As of the end of March, Utah, Wyoming and Kentucky
had passed bills.
H. Prognosis. The participating states have come farther
and faster than anyone reasonably expected. Many details, however, remain
to be worked out. Undoubtedly, many states will prefer to let others lead
the way, so getting an initial critical mass of states will be a challenge.
If individual state and local governments are willing to sacrifice some
of their prerogatives forthe greater good, and if thereis broad and enthusiastic
support from the traditional retail community, the Streamlined Sales Tax
System has a good chance of becoming a reality. The result will be a more
equitable, simple and just sales tax for all Utah businesses and citizens.
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