States Collaborate On Equitable Sales Tax System

In December, representatives of the 29 states participating in the Streamlined Sales Tax Project (SSTP) approved model legislation that they hope state legislatures will adopt this year. If enacted, the legislation would move states one step closer to a sales tax system that applies equally to both traditional and electronic retailers.

A US Supreme Court ruling bars states from requiring remote sellers, including mail order and internet companies, to collect sales tax. The Court concluded that forcing companies to comply with the varying rules and rates governing the nation's 7600 local and state tax jurisdictions would unduly burden interstate commerce.

The issue is of mounting concern to the states, which stand to lose an estimated $20 billion in revenue annually by 2003 as a result of the growth in electronic commerce. Moreover, the ruling gives remote companies, which contribute little to the communities where they do business, a five to eight percent price advantage over local retailers.

The goal of the SSTP, launched in early 2000, is to remove the burden of collecting sales taxes for multiple jurisdictions. Under the proposal, businesses would use state-certified software to calculate, collect, and remit tax for each sale. All costs would be covered by the states.

If adopted by state legislatures, the model legislation would accomplish two important steps. First, it would simplify and align each state's sales tax system. All participating states, for example, would share common product codes, tax law definitions, and registration procedures. Second, the legislation would authorize the state's revenue department to enter into an agreement with other participating states to design and implement the SSTP system.

For now, the project must proceed on a voluntary basis. Companies that participate will benefit from lower administrative costs and audit protection in exchange for agreeing to collect state and local sales taxes on out-of-state sales. The only volunteers are likely to be national retailers that already pay sales tax in every state (by virtue of having physical outlets in every state). It's unlikely than any mail order- or internet-only companies will voluntarily participate.

Mandating that these companies collect sales taxes will require an act of Congress. The SSTP states believe tax code simplification and collection software are necessary to convince federal lawmakers that such a requirement would not harm interstate commerce.

A bill sponsored by Senator Byron Dorgan of North Dakota would authorize states that have streamlined their tax systems to enter into a joint compact and require remote sellers with more than $5 million in annual income to collect sales taxes.

• More on the SSTP can be found on the National Governors Association web site
• Model legislation
• The Dorgan bill is available on the New Rules web site