On Oct. 1, 13 states will officially launch reformed systems that pledge compliance with the Streamlined Sales Tax Agreement, first devised in 2002 by a committee of state tax officials and billed as a way to make tax administration simpler and more uniform. Five more states have passed laws that, over the next two years, will bring them into compliance with the agreement.
Compliance with the system won't change the fact that tax collection remains voluntary for companies without a physical presence in the states where their orders originate, thanks to a 1992 Supreme Court decision.
But project backers say they hope the streamlined system, even with voluntary compliance, would attract participation from multistate companies that say the current tax system is too complicated.
"In some ways, this has absolutely nothing to do with the Internet," said project co-chair Scott Peterson of the South Dakota Department of Revenue. "What we're trying to do is simplify sales tax administration, whether that's for the downtown hardware store, 1-800-Flowers, or Walmart.com."
That means smoothing over differences among state tax procedures. For example, some states distinguish soft drinks from food when deciding tax rates on each, but the definition of soft drink varies widely, Peterson said. His project's solution? "Anything with less than 50 percent juice is considered a soft drink," he said. "Fifty percent or more, it's considered food."
The next step is to make collection by out-of-state vendors mandatory.
The National Governors Association and the National Council of State Legislators, among other groups, are lobbying Congress to introduce a measure this fall that would recognize the streamlined sales tax agreement and force all companies, including "out-of-state or remote vendors," to collect sales tax from customers in states that subscribe to the agreement, said David Quam, federal relations director for the Governors Association.
A tax-collection headache
In 1992, the U.S. Supreme Court concluded that a remote or mail-order retailer has to collect sales tax only from customers who order from states where the retailer has a physical presence. But even that decision doesn't leave shoppers off the hook.
Technically, those who live in states with sales taxes--there are 45 of them, plus the District of Columbia--are already supposed to pay fees on their out-of-state purchases, even if they were seemingly "tax-free." That's because all of those states have a use tax, typically levied at the same rate as the sales tax, on out-of-state items their residents have bought tax-free. If the item was bought out of state but taxed at a lower tax rate, some states, such as California, ask their residents to pay their home state the difference upon their return.
Most people, however, don't bother to file the returns. According to a 2004 study from the University of Tennessee's Center for Business Research, the states lost an estimated $15 billion in revenue because of their inability to collect taxes on certain e-commerce operations. The paper's authors predicted that number to climb to as much as $34 billion in 2008, based on a high-growth model.
Congress has already attempted--without success--to compel all businesses to collect taxes from customers living in states that back the streamlined plan.
In October 2003, Sen. Michael Enzi, a Wyoming Republican, introduced the Streamlined Sales and Use Tax Act, which would have required all businesses with a gross income of more than $5 million to gather the fees.
An identical bill was introduced on the House side, after which Rep. Bill Delahunt, a Massachusetts Democrat, remarked, "Brick-and-mortar businesses--and the communities that depend on them--