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Communications, Technology and Interstate Commerce

Click here to view printer friendly version of Governors Owens' Nine Misconceptions About the Streamlined Sales and Use Tax Agreement document. To read portable document format (.pdf )files, you must install
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Governor Owens' Nine Misconceptions
About the Streamlined Sales and Use Tax Agreement

Recently, Governor Bill Owens of Colorado, under the auspices of his new foundation, Center for the New American Century, issued a white paper attempting to answer questions about the Streamlined Sales and Use Tax Agreement. Unfortunately, Governor Owens' white paper, "Nine Problems with Taxing the Internet" is filled with misstatements and misconceptions. It is important for an honest discussion on the issue of remote sales tax collection that the record be set straight on the simplifications adopted by the States in Streamlined Sales and Use Tax Agreement and correct the misconceptions about how the Agreement will effect transactions over the Internet.

In January of 2000, State legislators and Governors in 32 states authorized their states to engage in multistate discussions on potential ways for states to collectively streamline and simplify their sales and use tax systems. The goal was to reduce the burden and costs of collection for all sellers and create a voluntary collection system for remote sellers. Throughout 2000, revenue officials of these 32 states met monthly and produced a set of recommendations for terms of an interstate simplification agreement to achieve the aforementioned goals.

In the 2001 and 2002 legislative sessions, 35 states enacted legislation to join the Streamlined Sales Tax Implementing States (Implementing States) to finalize the terms for an interstate simplified collection agreement. The Implementing States comprised of legislators, revenue department officials, governors' staff, local government officials and private sector representatives over the course of eleven months and nine meetings reached consensus on the provisions of an interstate agreement. On November 12, 2002 in Chicago, Illinois the delegates of the Implementing States unanimously ratified the comprehensive Streamlined Sales and Use Tax Agreement.

The Agreement substantially simplifies state and local sales tax systems, removes the burdens to interstate commerce that were of concern to the Supreme Court in two previous decisions, Bellas Hess and Quill, and protects state sovereignty. In addition, the agreement "levels the playing field" between main-street and out-of-state merchants and benefits all retailers by reducing their administrative costs. (Five additional states joined the Implementing States in 2003: California, Hawaii, New York, Massachusetts and Mississippi.)

As of July 2003, 20 states, representing over 30 percent of the total population of the United States, have enacted legislation to reform their sales tax administration in accordance with provisions of the Streamlined Sales and Use Tax Agreement. The states that have enacted legislation to implement provisions of the Agreement are:

It is our hope that the agreement will serve as the basis for Congress to grant authority to states to require all sellers, regardless of location, to collect sales and use taxes. The Streamlined Sales and Use Tax Interstate Agreement provides the states with a blueprint to create a simplified sales and use tax collection system that when implemented, provides justification for Congress to allow states to request remote sellers to collect sales taxes as was intended in the Quill decision. 

The Straight Answers to Governor Owens Nine Questions

Yes, if a state so decides. Each state legislature has the authority or the sovereignty to make their participation with the Streamlined Sales Tax Agreement revenue neutral.

2. Will the Agreement simplify tax compliance for America's merchants as its proponents suggest?

Yes, even if the states did nothing more than adopt the proposed administrative changes contained in the Agreement, all vendors would enjoy reduced compliance complexity. Under the Agreement all merchants would be held harmless for any miscalculations.

3. Does the Agreement pose threats to consumer privacy?

No, the Agreement provides that a certified service provider "shall perform its tax calculation, remittance, and reporting functions without retaining the personally identifiable information of consumers."

4. Will the Agreement require your state and its local jurisdictions to forfeit sovereignty over tax policy in your state?

No, compliance to the Agreement is always optional for a state. The decision to comply with the provisions of the Agreement can only be made by each state legislature and governor-and they can withdraw at any time.

5. Is the Agreement consistent with the Constitutional doctrine of federalism?

Yes, the Agreement is voluntary for states and for merchants. This is not a mandatory compact or violation of the Commerce Clause of the Constitution.

6. Will the Agreement reduce tax policy competition between states?

No, the state legislature in each state that complies with the Agreement will still decide what is taxed, who is exempt and at what rate it wants to tax transactions.

7. Will the Agreement impede the success of the technology revolution?

No, the Agreement provides for technology that will not add any additional forms for the online buyer to complete. The information the buyer provides for the delivery or payment of the product is sufficient to determine the correct sales tax.

8. Will the Agreement hurt certain citizens more than others?

No, all buyers in a state that complies with the Agreement will pay the same sales tax on a transaction regardless if it occurs in a brick and mortar store or online.

9. Will the Agreement really promote equity between brick-and-mortar and online retailers?

Yes, all transactions regardless of the way they are purchased will be treated the same under the Agreement and all retailers will receive reasonable and adequate compensation to cover the costs of collection.

1. Is the Agreement revenue neutral?

Governor Owens' White Paper:

"No. SSTP will increase the tax burden on most American consumers...States that currently exempt certain goods from taxation could be forced to extend sales taxes to currently untaxed products...Those states that do not currently reimburse instate merchants for their costs of collection will be mandated to pay a uniform reimbursement rate for all merchants, whether in state or out of state."

Streamlined Sales and Use Tax Agreement:

Each state legislature has the authority or the sovereignty to make their participation with the Agreement revenue neutral if they choose by lowering sales tax rates or by reducing other taxes such as property and/or income. The Agreement is only a blueprint to allow for the collection of sales taxes that are legally levied but presently uncollected, it is not designed to decide policy issues such as what is taxed, tax rates or even revenue neutrality for each state. The Agreement only requires that if a state chooses to tax a product they used the uniform definitions contained in the Agreement.

The white paper is correct in that some states presently do not compensate sellers for collecting sales taxes. This is one of the choices state legislatures have to make in considering their participation in the Agreement. However, states that comply with the Agreement will have the option to cover the costs for compensation out of the revenues collected from remote sales, another form of revenue neutrality. Most state legislators believe it is only fair to compensate vendors for collecting states' sales taxes.

2. Will the Agreement simplify tax compliance for America's merchants, as its proponents suggest?

Governor Owens' White Paper:

Even if states did nothing more than adopt the proposed administrative changes contained in the Streamlined Sales and Use Tax Agreement, all vendors would enjoy reduced complexity. Governor Owens contends that rates are the biggest complication, but even Robert Comfort, Vice President for Tax Policy, Amazon.com told a congressional hearing in 2001, "...rates are not a problem for Amazon.com." Sellers have testified over and over that the real burdens with collection are not sales tax rates but the different product definitions from state to state, different state and local tax bases and the different rules and administrative procedures for registering, collecting, filing and remittance of sales taxes.

Under the Agreement, the certified technology calculates the sales tax to be collected not the merchant. The merchant does not need to determine the zip code. When the consumer is making a remote purchase, information such as zip code is obtained when the consumer fills in the delivery address. The certified technology that will be used by the merchant determines the sales tax, if any, on a purchase from the delivery address submitted by the consumer. When the Agreement is operational, all merchants that collect sales taxes using the state certified technology would be held harmless for any miscalculations. The state assumes the liability from the merchant, who under the current collection system bears total liability.

In the example cited in Governor Owens' White Paper, the merchant would only be held liable for undercollection, if the merchant tampered with the certified technology or fraudulently failed to remit the sales taxes collected.

Governor Owens' White Paper:

The Streamlined Sales and Use Tax Agreement has strong provisions that will protect the privacy of all consumers. The Agreement provides that a certified service provider "shall perform its tax calculation, remittance, and reporting functions without retaining the personally identifiable information of consumers." The only time that a certified service provider is allowed to retain personally identifiable information is if the buyer claims an exemption from taxation.

The Agreement requires the certified service providers to retain less information than is currently captured by VISA, MasterCard, American Express, Discover, or any other credit card company when a consumer makes a purchase and these companies can use this information for marketing purposes. If certified providers use or sell any information gathered from calculating sales taxes, they would lose certification to be a collector.

Let's set the record straight: the only information maintained by the vendor or third party collector for sales tax calculation are product, price, zip code, and sales tax collected. Unless the woman that is mentioned in Governor Owens' example is the only person living in the zip code, no one would know who she is!

Governor Owens' White Paper:

No, the Streamlined Sales and Use Tax Agreement does not force any state to forfeit its sovereignty. Compliance to the Agreement is always optional for a state. The decision to comply with the Agreement can only be made by the state legislature and governor-and they can withdraw at any time.

Each state that complies with the Agreement will have one vote on the Governing Board of the Agreement. Each state that complies with the Agreement can have a delegation of up to four people with the state legislature in each state deciding who represents the state. In many cases state legislators and tax administrators have been designated to serve on the Governing Board. The Agreement protects the sovereignty of each state to decide who represents them.

Governor Owens fails to mention that the 60-day notice on amendments must go to the governor and the legislative leaders of each member state; the same governor and legislative leaders who have appointed the delegates to the Governing Board. Governor Owens also fails to mention that an amendment can not change or alter a "state's tax laws." Only the state legislature and the governor have that authority and nothing in the Agreement abrogates that authority.

Governor Owens' White Paper:

Yes. The Streamlined Sales and Use Tax Agreement does not in anyway violate the Constitution and is actually a vibrant example of federalism. The Agreement is voluntary for states and for merchants, this is not a mandatory compact or violation of the Commerce Clause of the Constitution. The states voluntarily participated in the process to formulate the Streamlined Sales and Use Tax Agreement by enacting legislation by the people's elected representatives in each state, signed by the governor. The Agreement ratified by the states' delegates responds to the challenges raised by the Supreme Court in two decisions, Belles Hess and Quill, and provides a blueprint for Congress to overturn the decision.

Should Congress grant states remote sales tax collection authority if they comply with the Agreement than businesses that are located in a state that "democratically chooses not to join the uniform tax scheme," would only be subject to collection requirements under the Agreement if that seller chooses to sell into a state that "democratically" decided to be party to the Agreement. The Governor exclaims fear that "This implicates profound practical and theoretical federalism concerns." However, no seller is forced to sell into states that comply with the Agreement. Out-of-state sellers make that decision and in doing so they also make themselves liable to the other state's non-sales taxes statutes and regulations protecting consumers and conducting business. An insurance company domiciled in Illinois must follow Colorado's insurance laws when doing business in Colorado, the same for banks and many other interstate businesses.

Governor Owens' White Paper:

No. As has been stated many times, the state legislature in each state that complies with the Streamlined Sales and Use Tax Agreement will still decide what is taxed, who is exempt and at what rate it wants to tax transactions. How is tax competition "dumb downed" by simplified administrative efficiency or even uniform product definitions? In fact, the competitive strength of America's businesses would be enhanced by reducing the regulatory complexity, costs and burden of the current state sales tax collection system on businesses? Who could oppose reducing or eliminating governmental burden and costs?

The Streamlined Sales and Use Tax Agreement is a prime example of states as "laboratories of democracy." States working together have developed a solution to ensure the viability of a major revenue stream while eliminating the burden, complexity and cost on retailers to collect the states' sales taxes and maintaining state sovereignty for tax policy. State legislators and governors are finding ways to maintain vital government services such as education, health care, public safety and homeland security while ensuring the viability of America's businesses in a global marketplace.

If Governor Owens or his staff has attended the deliberations of the Streamlined Sales Tax Implementing States, they would understand that the Agreement is not the work of a small group of states trying to coerce concessions from the other economically competitive states. First, the Agreement was developed and ratified by representatives from 35 states with very different tax collection systems. In most cases, the Agreement's provisions represent the collection practice of a majority of the sales tax states. Second, there is no mandatory collection authority unless Congress gives its consent and that will not happen if it appeared that this was an effort by a handful of "non-competitive" states wanting to "piggy-back on the economic investments of 40 other states." Finally, as of July 8, 2003, 20 states representing over 30 percent of the population have enacted legislation to comply with the Streamlined Sales and Use Tax Agreement. At least three additional state legislatures are planning to enact the compliance legislation before the end of this year.

Governor Owens' White Paper:

Under the Streamlined Sales and Use Tax Agreement, the buyer making a transaction will not need to fill out any additional forms in order for the sales tax to be calculated or collected. The tax is determined by the delivery address, and anyone who is buying a tangible product online wants to make sure that the product is delivered to the right address. The consumer fills out only one address field. In cases of digital products like online books or movies, the online seller wants to be paid and they will not accept a credit card payment without address verification. Once again, no additional tax form would be required.

A study released by Jupiter Research in January 2003 "Sales Tax Avoidance Is Imperative to Few Online Retailers and Ultimately Futile for All" found most people are unaware that they are not paying sales taxes when they make a purchase over the Internet. In the same study by Jupiter, only 4 percent of online buyers said that the collection of sales and use taxes would always affect their decision to buy online.

The effort to streamline sales tax collection is not a new tax on electronic commerce. Online sellers already collect sales taxes where they have nexus. The effort of states to streamline sales tax collection will only remove the burden from all sellers in collecting a tax already levied by state and local governments.

Those who oppose applying sales taxes to purchase of digital goods such as books, movies and magazines are, no doubt inadvertently, arguing in favor of keeping pornography tax-free. The access to online pornography has and continues to be one of the largest sellers among digital products downloaded, most if not all currently sales tax free. The Agreement treats the sales of products the same, regardless of the medium that one obtains access. If a state taxes the purchase of an adult or x-rated magazine in the real world, why should the same magazine downloaded or delivered electronically not be taxed?

Governor Owens' White Paper:

If brick and mortar stores are not as accessible in rural areas as they were ten years ago, perhaps they no longer can afford to compete with the price advantage enjoyed by online/remote sellers that do not collect sales taxes. When brick and mortar stores in rural areas are forced out of business that means the rural farmer will have to pay higher property taxes on his farm or increased state income taxes. Higher property or income taxes, just so that one can buy a book or CD on-line sales tax free?

Governor Owens implies that the streamlined sales tax effort will "have the effect of widening the so-called "digital divide." Unfortunately he fails to show an equal concern for those hard working Americans who may lack the credit or the ability to shop on line because of a lack of access to the Internet or even a computer. These Americans are paying the sales tax every time they make a purchase in a local brick and mortar store. However, those consumers who have sufficient credit, home computers and access to the Internet are able to avoid the sales tax with almost every online purchase.

Governor Owens White Paper:

As was stated previously, the Streamlined Sales and Use Tax Agreement requires states to compensate merchants for compliance. However Governor Owens' White Paper contradicts itself. Earlier in the White Paper, Governor Owens states, "Those states that do not currently reimburse in-state merchants for their costs of collection will be mandated to pay a uniform reimbursement rate for all merchants, whether in state or out-of-state." Now he writes those online merchants will be disadvantaged compared to brick and mortar sellers because of compliance costs.

Governor Owens' white paper ignores the fact that the online merchant does not pay the sales tax; rather the merchant merely collects the sales tax from the buyer and remits it to the state where the buyer resides or to where the purchase is being delivered and used. The online seller receives all the "many benefits governments sometimes offer traditional retailer" in the state(s) they are located.

Governor Owens White Paper concludes with "...the headlong rush to accomplish this sea change in American tax policy, often without a detailed public debate and the outside glare of media and taxpayer scrutiny must be slowed. Significant questions - including the nine asked here - must be faced, discussed and adequately answered..."

For the last five years, there have been numerous debates, study projects, joint private and public projects, federal commissions, congressional hearings, and three separate actions by state legislatures and governors to have their states involved in multistate discussions to streamline the states' sales and use tax systems. For most states that have complied with the Agreement, it is at least the second time that the state legislature has had to pass legislation with the intent to simplify their sales tax collection system and for most of those states it was likely the third time. If you add all the efforts back to the first Supreme Court decision in 1967 (Bellas Hess) it has been almost a lifetime of public debate.

So far twenty state legislatures and twenty governors asked and agreed with the answers contained in this response to the questions posed by Governor Owens white paper in enacting legislation to bring their states into compliance with the Streamlined Sales and Use Tax Agreement. Of the remaining 45 states and the District of Columbia that have a sales and use tax all but one, Colorado, have expressed some intent to simplify their sales and use tax collection systems. In 2003 even three of the five non-sales tax state legislatures saw the introduction of the Streamlined Sales and Use Tax Agreement (Alaska, Montana, and Oregon).

The Streamlined Sales and Use Tax Agreement is a significant attempt to modernize sales and use tax systems and to save this tax on consumption as a viable component in state revenue mixes. The Agreement substantially simplifies state and local sales tax system, removes the burdens to interstate commerce that were of concern to the Supreme Court, and protects state sovereignty. In addition, the Agreement "levels the playing field" between local and out-of-state merchants and benefits all retailers by ensuring that all transactions no matter through what medium they may take place, will be treated identically.

The Agreement and the effort to obtain Congress' approval to give states that comply with the Agreement the authority to require all sellers to collect sales and use taxes is supported by many retailers and business organizations. A partial list of private sector supporters include:

Alabama Retail Association

American Booksellers Association

American Jewelers Association

Ames Department Stores

Atlantic Independent Booksellers Association

CBL & Associates Properties, Inc.

Circuit City Stores, Inc.

Electronic Commerce Association

First Washington Realty Trust, Inc.

Florida Institute of Certified Public Accountants

Florida Retail Federation

Gateway Companies, Inc.

General Growth Properties, Inc.

Georgia Retail Association

Great Lakes Booksellers Association

Home Depot

Illinois Retail Merchants Association

International Council of Shopping Centers (ICSC)

International Mass Retail Association

(IMRA)

Kentucky Retail Association

Kimco Realty Corporation

K-Mart Corporation

Lowe's Companies, Inc.

Michigan Retailers Association

Mid-South Booksellers Association

Missouri Retailers Association

Mountains & Plains Booksellers Association

National Association of College Stores

National Association of Convenience Stores

National Association of Industrial and Office Properties (NAIOP)

National Association of Real Estate Investment Trusts (NAREIT)

National Association of Realtors (NAR)

National Community Pharmacists Association

National Retail Federation

New England Booksellers Association

North American Retail Dealers Association (NARDA)

Northern California Independent Booksellers

Pacific Northwest Booksellers Association

Performance Warehouse Association

PETsMART, Inc

RadioShack Corporation

Regency Realty Corporation

Retailers Association of Massachusetts (RAM)

ShopKo

Simon Property Group

Southeast Booksellers Association

Southern California Booksellers Association

South Carolina Merchants Association

Staples, Inc.

Target, Inc.

Taubman Centers, Inc.

The Gap, Inc.

The Macerich Company

The Musicland Group, Inc.

The Real Estate Roundtable (RER)

The Rouse Company

Variety Wholesalers

VerticalNet, Inc.

Virginia Retail Merchants Association

Wal-Mart

Weingarten Realty Investors

Westfield America, Inc.