Over the past decade, state and local governments have become increasingly frustrated by the sales-tax revenue lost on purchases by their residents from out-of-state vendors.
The states can't push remote mail-order and Internet-based businesses to collect sales tax because of a 1992 Supreme Court decision that ruled that monitoring the multiplicity of tax rates and bases across the nation's hundreds of jurisdictions would impose too costly a burden on these firms.
To answer the court's concerns, 29 states have spent the past two-and-a-half years hammering out a sales-tax-simplification process. Under the current draft of the Streamlined Sales Tax Project (SSTP), each state must adopt one tax base statewide; hold only one audit per period per vendor; provide state level administration of sales and use taxes; and compel its local jurisdictions to maintain only one tax rate per jurisdiction.
Simplify Collection
Legislation based on the SSTP has been presented to a number of legislatures, but plenty of roadblocks remain, including concerns by local jurisdictions that collect their own sales taxes.
Five states - Alabama, Alaska, Arizona, Colorado and Louisiana - allow for local administration of sales tax. Officials within these "home-rule" cities and counties have problems with each element of the SSTP. The main sticking point is mandated state administration of sales-tax collection. Oklahoma also allows jurisdictions to collect their own tax, but none currently do so; these jurisdictions are involved in the present negotiations because they wish to retain the option to self-collect.
"State-controlled administration is one of the main problems for us," said Betty Peterson, director of the Madison County Sales Tax Department in Huntsville, Ala. "When we [collect sales tax] at the local level, the revenues are higher, and we get the money quicker."
Representatives from jurisdictions within the five states, known collectively as the Local Government Issues Study Group, presented their concerns with the current draft of the SSTP in mid-June at a meeting in Baltimore.
In general, local tax administrators collect a higher percentage of sales tax than state administrators. When Loveland, Colo., changed from state to local collection of sales tax in 1998, the city collected $2 million more in its first year, a 15 percent growth in revenue despite a stable economy and tax base.
Bettye Griggs, principal auditor of Birmingham, said Alabama municipalities coming out from under state administration in the 1990s increased their sales-tax revenue from 10 percent to 20 percent on average.
Under the proposed SSTP, Griggs said, "We conservatively estimate losses [in Birmingham] of between $10.6 million and $21.2 million dollars in sales- and use-tax revenue alone."
One reason for the difference is local governments have better oversight of businesses starting up within their districts.
"We're in the towns and counties," Peterson said. "We know what's going on much more so than somebody in the state capital."
Local governments also tend to pursue criminal remedies against negligent businesses more aggressively than states due to the financial incentive. Alabama, for instance, receives less than $4 per account per month for its sales-tax collection efforts, so the state has little incentive to spend more resources chasing down lost funds for its cities.
Local governments also audit companies more aggressively than states.
Susann Stubbs, director of tax compliance for the city and county of Denver, said although Colorado state auditors handle 5,200 accounts each, Colorado's 20 self-collecting cities average only 1,500 accounts per auditor.
"Denver has 700 accounts per auditor," she said. "We're willing to spend more resources to collect revenue."
In a draft of an issue paper concerning state administration and auditing that was presented at the SSTP meeting in Baltimore, the Colorado entities within the Local Government Issues Study Group argued that, "The state [Colorado] has demonstrated that it cannot or will not do what it takes to adequately enforce sales tax for local entities."
In addition to collecting fewer revenues, states have acquired a reputation of reneging on promised budget funds when the economy goes south.
"In Alabama, the state sales tax goes to help fund education," Peterson said. "For the past several years, the governor has said that we're not going to get as much money as originally planned because collections are down. This has made schools more dependent on the money that [the local jurisdictions] collect for them."
Peterson and other officials fear their local sales-tax dollars might pull a similar disappearing act if the state takes over the collection process.
Worst of all, she said, "While the state says their collections are down, ours have been up - in some cases in double digits - and we're collecting from the same businesses."
Setting aside the collection rates, Alaska has an even greater problem with the proposed move toward mandated state administration: Alaskan municipalities have always had full sales-tax authority, which means that any state-controlled administration would have to be created from scratch.
Losing Revenue
The SSTP provisions calling for a single statewide tax base and the adoption of one tax rate per jurisdiction also have local administrators reaching for their calculators to sum up lost revenue.
George Marretta, revenue manager of Baton Rouge, La., and the Parish of East Baton Rouge, said the Louisiana state tax base exempts food and drugs while many localities do not.
"If the state suddenly had to tax food, it would create a big controversy," he said. "And if we had to exempt food for our tax base, that would create a tremendous hole in our revenue source."
eFileSolutions, a Baton Rouge-based seller of business and tax software, estimates Louisiana parishes would lose 30 percent of their sales-tax revenue - $600 million annually - if they were forced to adopt the state tax base.
Similarly, under Arizona's existing Model City Tax Code, Arizona cities can tax such items as residential rentals, commercial rentals, advertising and speculative builders that are not taxable by the state. Conforming themselves solely to the tax base of the Arizona Revised Statutes - upon which the Model City Tax Code is based - would wipe out 25 percent of these jurisdictions' tax revenues.
Imposing a single sales-tax rate would also undo the results of bond issues and other specialized, voter-approved measures, which often impose a sales-tax increase on particular items to pay their cost, in numerous localities.
Denver has a base sales-tax rate of 3.5 percent, but short-term car rentals carry a 7.25 percent tax rate to help pay for the city's convention center. The city also has two other voter-approved tax rates in addition to a lodger's tax and a "seat tax."
To move to a single tax rate citywide would require a higher overall tax rate in order to pull in the same volume of revenue. Even if that rate were approved by voters, a court challenge would be inevitable since the change would violate the intent of the voters on previously approved bond measures. more aggressively than states due to the financial incentive. Alabama, for instance, receives less than $4 per account per month for its sales-tax collection efforts, so the state has little incentive to spend more resources chasing down lost funds for its cities.
Local governments also audit companies more aggressively than states.
Susann Stubbs, director of tax compliance for the city and county of Denver, said although Colorado state auditors handle 5,200 accounts each, Colorado's 20 self-collecting cities average only 1,500 accounts per auditor.
"Denver has 700 accounts per auditor," she said. "We're willing to spend more resources to collect revenue."
In a draft of an issue paper concerning state administration and auditing that was presented at the SSTP meeting in Baltimore, the Colorado entities within the Local Government Issues Study Group argued that, "The state [Colorado] has demonstrated that it cannot or will not do what it takes to adequately enforce sales tax for local entities."
In addition to collecting fewer revenues, states have acquired a reputation of reneging on promised budget funds when the economy goes south.
"In Alabama, the state sales tax goes to help fund education," Peterson said. "For the past several years, the governor has said that we're not going to get as much money as originally planned because collections are down. This has made schools more dependent on the money that [the local jurisdictions] collect for them."
Peterson and other officials fear their local sales-tax dollars might pull a similar disappearing act if the state takes over the collection process.
Worst of all, she said, "While the state says their collections are down, ours have been up - in some cases in double digits - and we're collecting from the same businesses."
Setting aside the collection rates, Alaska has an even greater problem with the proposed move toward mandated state administration: Alaskan municipalities have always had full sales-tax authority, which means that any state-controlled administration would have to be created from scratch.
Losing Revenue
The SSTP provisions calling for a single statewide tax base and the adoption of one tax rate per jurisdiction also have local administrators reaching for their calculators to sum up lost revenue.
George Marretta, revenue manager of Baton Rouge, La., and the Parish of East Baton Rouge, said the Louisiana state tax base exempts food and drugs while many localities do not.
"If the state suddenly had to tax food, it would create a big controversy," he said. "And if we had to exempt food for our tax base, that would create a tremendous hole in our revenue source."
eFileSolutions, a Baton Rouge-based seller of business and tax software, estimates Louisiana parishes would lose 30 percent of their sales-tax revenue - $600 million annually - if they were forced to adopt the state tax base.
Similarly, under Arizona's existing Model City Tax Code, Arizona cities can tax such items as residential rentals, commercial rentals, advertising and speculative builders that are not taxable by the state. Conforming themselves solely to the tax base of the Arizona Revised Statutes - upon which the Model City Tax Code is based - would wipe out 25 percent of these jurisdictions' tax revenues.
Imposing a single sales-tax rate would also undo the results of bond issues and other specialized, voter-approved measures, which often impose a sales-tax increase on particular items to pay their cost, in numerous localities.
Denver has a base sales-tax rate of 3.5 percent, but short-term car rentals carry a 7.25 percent tax rate to help pay for the city's convention center. The city also has two other voter-approved tax rates in addition to a lodger's tax and a "seat tax."
To move to a single tax rate citywide would require a higher overall tax rate in order to pull in the same volume of revenue. Even if that rate were approved by voters, a court challenge would be inevitable since the change would violate the intent of the voters on previously approved bond measures.
An Alternate Approach
To address all of these concerns, tax administrators in the home-rule states favor more generalized wording in the SSTP to allow for the adoption of centralized administration of taxes over state-controlled administration.
"We, as local administrators, do not want the state to collect our money," said Jerry McWherter, tax administrator for Louisiana's Natchitoches Tax Commission.
Whether sales-tax collection is state-controlled or merely centralized, the same rules will apply in both cases for businesses and jurisdictions, McWherter said.
Jurisdictions must take responsibility for placing their tax rate and base information into a central database that can be accessed by remote businesses when they make sales within the state. If a jurisdiction does not submit the data, the business cannot be held responsible for missing tax revenue.
Businesses, under either centralized or state-controlled administration, "would have to track every item that's sold in the state of Louisiana to properly place where it is sold and the proper tax [so that the administration can] tell where the funds have to go," said McWherter.
Louisiana's Marretta said Louisiana jurisdictions have been working with state senators on a plan to enhance the state's Web site so remote vendors can file and pay local sales taxes once at the state level. The funds would bypass state control and be delivered directly to each local government.
Colorado, Alaska, Arizona and Alabama favor such centralized plans, although the details vary from state to state. The state constitutions of Colorado and Louisiana grant jurisdictions the right to collect sales tax - which means that the SSTP as currently written would be unconstitutional and, therefore, unenforceable, within these states.
In the other home-rule states, local jurisdictions would likely lobby against the SSTP in an effort to keep the status quo, rather than risk an uncertain financial future.
If the states won't agree to the local governments' plan, the SSTP might well be dead within those states. If enough states pass the SSTP, then Congress will likely take action on the remote sales-tax issue.
However, if only five to 10 states pass the SSTP, then Congress will likely do nothing.
Jurisdictions are avoiding dire talk for the present time, though, because they, like the states, would love to start collecting these lost revenues. Having only one location per state where businesses can report sales and pay taxes would be a radical change to the current collection processes locals practice, but Stubbs says Denver and other jurisdictions in home-rule states will make that adjustment under the right circumstances.
"We just don't want the state to be that one place," Stubbs said.
