Arkansas, North Dakota Join Internet Sales Tax Agreement

Giant budget deficits in states cause reconsideration of the Streamlined Sales and Use Tax Agreement

by / May 21, 2003
Washington, D.C. -- A project designed to bolster chances for Internet sales taxes legislation is closer to its goal after Arkansas and North Dakota recently agreed to become members of the Streamlined Sales and Use Tax Agreement (SSUTA). The two states are the sixth and seventh to enact the legislation aimed at creating a national standard for collecting taxes owed on Internet and mail-order sales. Also on board are Kentucky, South Dakota, Utah, West Virginia and Wyoming.

In November, a group known as the Streamlined Sales Tax Implementing States consisting of 100 representatives from both the public and private sectors in 34 states and the District of Columbia agreed that the agreement would not take effect until 10 states representing 20 percent of the population of the 45 states with sales taxes adopted it. Currently, the seven states only represent 4.5 percent of the population of states with sales taxes. However, 17 states have introduced legislation and could make the agreement go into effect as early as next month.

The first 10 states in the agreement will be represented on the implementing states' governing board, providing incentives for state legislatures to act quickly. The board would then make sure each state under the agreement is in compliance with the board's standards. From there, an online retail-collection system would be created.

In addition, retailers can choose to voluntarily participate, even if they are not within one of the implementing states. Once the agreement becomes effective, L.L. Bean, for example, could volunteer, and for every sale it ships to someone in a participating state, that state would receive taxes from the buyer of L.L. Bean's products.

The agreement is designed to reduce the thousands of individual state sales tax rates, making it manageable for direct marketers to collect sales taxes online. Several thousand local governments impose sales taxes. All have different rates, rules and definitions of what is taxed and what is exempt. Because of this complexity, the U.S. Supreme Court ruled in 1967 that businesses don't have to collect taxes for states unless they have a physical presence in the state. But that ruling has garnered attention because of the huge amount currently being spent on Internet remote sales.

A recent University of Tennessee study found that governments lost $13.3 billion in e-taxes in 2001, and estimated that losses would grow to $45 billion by 2006. Many large retailers, such as Wal-Mart, the Gap and Sears, have sparked a trend in charging Internet sales tax because they have both online and brick-and-mortar presences.

North Carolina and Minnesota are nearly ready to become the eighth and ninth implementing states, which would add another 13.2 million people, for an implementing states total of 9.2 percent of the population of the 45 states with sales taxes.

"Essentially, North Carolina and Minnesota enacted the agreement last year before it was completed. They felt the political timing was right. There are really minor changes they need to make to deal with the agreement's uniform definitions, but they've already done a lot of the heavy lifting," Williams said.

"The bigger states typically have more complicated systems. There's also more political work to be done when making complicated systems more simple," he added. "The larger states also typically have higher sales tax rates, although that's a gross generalization. I think the incentive [to join the agreement] is equal for small and big states."

Neal Osten, chief lobbyist, NCSL Washington D.C. office, said the bigger states will play important roles in helping his group lobby Congress later this year.

"Texas and Florida rely solely on sales tax, so this is important for them," Osten said. "And we're making progress in both California and New York, which have [pending] legislation for the first time ever to become part of the agreement."

In California, a Senate committee recently approved to join the implementing states. Although Gov. Gray Davis once vetoed a similar bill because he said the Internet was too new to have sales taxes, his state's budget crisis may leave him no choice but to approve such a measure.

While the SSUTA is voluntary for retailers and states, that could all change once the states' effort reaches Congress. "The Senate has been more supportive of this, while the House looks at this as a new tax," Osten said. "We want to wait until June or July to get more states, and then introduce legislation and kick this thing off. There's enough support in the private sector." Osten added that Internet sales taxes might be added to a bill that deals with Internet access. That bill, the Internet Tax Freedom Act, which placed a moratorium on new Internet access taxes, might be a good companion bill because of its urgency," he said. The moratorium expires on Nov. 1.

NACo passed a resolution on the Internet Tax Freedom Act, and plans to begin lobbying Congress to enact federal legislation on Internet sales taxes once the SSUTA reaches its goal of 10 states and 20 percent of the population of states that collect sales taxes.

By Paul Mackie -- NACo staff writer