The Streamlined Sales Tax Project is designed to create a 21st century state and local sales-tax system to bring dynamic efficiency to the economy and level the playing field for all retailers. It is estimated that a simplified system could save businesses millions of dollars in efficiencies by removing the burden of sales tax collection.
Under the agreement, which would become operable as soon as 10 states enacted legislation to comply with the agreement, participating states would have to have only one tax rate for personal property or services effective the end of 2005. Food and drugs would be exempt from the rule, as would electricity, natural gas, and the transfer of motor vehicles, planes, watercraft, modular, manufactured, or mobile homes.
America's sales and use tax system -- with 7,500 state and local taxing jurisdictions across the nation -- is antiquated, terribly complex and cumbersome to businesses in today's new economy. One of the problems with so many taxing jurisdictions is that they often have different laws or definitions of what is taxable -- a marshmallow might be defined as a food in one state, but as a candy -- and, therefore, not taxed -- in the next.
That arrangement makes it very difficult for "remote" retailers, such as mail order companies and e-commerce companies, to know, calculate, collect, and remit sales taxes at varying rates to different state and local governments.
"The inequities in the process are so strong we are compelled, as a country, to fix them," said Utah Gov. Michael Leavitt. "If we eliminate the friction between many different parts, then we will create an economic engine for growth in the 21st century."
The effort, if successful, would be the first overhaul of the nation's sales tax policy in 40 years, and the first time states had acted together to significantly restructure the system.
A 1992 U.S. Supreme Court case ruled that states must first simplify their sales tax laws in order to require out-of-state retailers to collect and remit those levies. Congressional action or a decision by the high court would be needed to give states that authority.
Congress in November 2001 moved to re-impose a federal moratorium on Internet access taxes while sidestepping the more important issue of collecting taxes on e-commerce. Meanwhile, states continue to press ahead with plans of their own to solve the problem.
The inability of states to collect existing online sales taxes also is dramatically impacting state and local government financing. A recent University of Tennessee study commissioned by the Institute for State Studies found that states could lose $13 billion this year and as much as $55 billion in 2011 because of the problem.
Because nearly half of state revenues come from sales taxes, failure to reform the country's sales tax system could jeopardize essential government services like education and 911 emergency operations.
Taxes are already on the books for online transactions. The problem is that most customers don't know they're supposed to pay them and states lack an effective enforcement mechanism to collect them.
In 1992 the U.S. Supreme Court ruled states can't force retailers without a physical presence in the consumer's state to collect sales taxes. The court reasoned that the current patchwork of roughly 7,500 taxing jurisdictions across the country is too complex and burdensome for online retailers. In order to collect sales taxes, the court ruled, states would need to first simplify the existing system.
Streamlining America's antiquated and complex sales tax system is no small feat. Intense lobbying in state capitals to keep the status quo will surely take place.
Many challenges lie ahead, and questions remain unanswered.
- Will Congress in two years pass legislation giving states the ability collect existing online sales taxes?
- If not, will states and local governments have to develop a new way of raising revenue to pay for education, law enforcement, and other critical services?
- What does a simplified sales tax system really mean for consumers and businesses?
- How will emerging technologies like Internet telephony be affected by this change in tax policy?
