Streamlined Sales and Use Tax Agreement
Misconceptions and Misstatements
May 14, 2010
Over the last nine years, as NCSL has worked to develop a simplified and fairer sales tax system, we have heard criticisms and arguments against streamlining and against Congress setting aside the Bellas Hess and Quill decisions. Below are some misconceptions or myths that opponents like to use to attack the Streamlined Sales Tax effort and the facts from NCSL as to why those statements are incorrect.
Myth: “The Streamlined Sales Tax Agreement does not simplify tax compliance for retailers.”
Fact: Even if states did nothing more than adopt the proposed administrative changes contained in the Streamlined Sales and Use Tax Agreement, all retailers will benefit from reduced complexity. Opponents contend that rates are the biggest complication, but even Robert Comfort, Vice President for Tax Policy at 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 automated system calculates the sales tax to be collected not the merchant, based upon the delivery address submitted by the consumer. All merchants that collect sales taxes using the state certified automated 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. The merchant would only be held liable for under-collection, if the merchant tampered with the certified technology or fraudulently failed to remit the sales taxes collected.
Myth: “The Agreement will pose a threat to consumer privacy.”
Fact: 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 me 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 consumer is the only person living in the zip code, no one would know who the consumer is!
Myth: “The Agreement will force states to forfeit sovereignty over tax policy to out-of-state bureaucrats.”
Fact: 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.
The Agreement also requires a 60-day notice on amendments that must be sent 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. The Streamlined Sales Tax Governing Board cannot change any state’s sales tax statute, only the state legislature and the governor have that authority and nothing in the Agreement abrogates that authority.
Myth: “The Agreement and federal legislation to require remote sales tax collection would violate the Constitutional doctrine of federalism. It would force businesses in states where the legislatures have chosen not to join the system or do not have a sales tax to collect sales taxes for other states.”
Fact: 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 these decision.
Should Congress grant states remote sales tax collection authority if they comply with the Agreement, then businesses that are located in a state that chooses not to comply with the Agreement or that has no sales, tax would only be subject to collection requirements under the Agreement if that seller chooses to sell into a state in which the legislature has decided to comply with the Agreement. Opponents exclaim 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 New Hampshire’s insurance laws when doing business in New Hampshire, the same for banks and many other interstate businesses.
Myth: “The Agreement will reduce tax policy competition between the states.”
Fact: No. As I have 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 eliminated 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 the current $ 6.8 billion a year it costs American retailers to collect our sales taxes?
The Streamlined Sales and Use Tax Agreement is a prime example that states are “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.
Myth: “The Agreement will impede the success of electronic commerce. Collecting sales taxes on electronic commerce transactions is a new tax.”
Fact: 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.
Myth: “The University of Tennessee’s study on revenue loss for states due to remote sale transactions is not accurate. The estimates of revenue loss are too high.”
Fact: The Business and Research Center at the University of Tennessee issued its first study on potential revenue loss due to transactions that occur through remote sellers, including electronic commerce in 2001. This study was updated in July 2004 at the request of the National Conference of State Legislatures and the National Governors Association. The updated study shows that the estimates of potential revenue loss was not as high as first predicted. In April 2009, the University of Tennessee released a new study which shows that the estimated loss of revenue for states in 2012 will be $23.3 billion. The authors of both studies, Dr. Donald Bruce and Dr. William Fox, provided the following explanation for the difference in estimates between 2001 and 2004: “ The experience of the last several years indicates that e-commerce has been a less robust channel for transacting goods and services than was anticipated when we prepared the earlier estimates. The findings provided here are based on lower estimates of e-commerce, and the result is a smaller revenue loss than we previously indicated. Our loss estimates are also lower because many more vendors have begin to collect sales and use taxes on their remote sales. Still, the Census Bureau reports a combined $1.6 trillion in 2002 in e-commerce transactions by manufacturers, wholesalers, service providers, and retailers, and Forrester Research, Inc.’s expectations continue to be for a strong growth in e-commerce in coming years. Thus the revenue erosion continues to represent a significant loss to state and local government.”
Myth: “The Agreement will widen the digital-divide, because it will disproportionately impact rural, low income, disabled or even elderly buyers.”
Fact: If brick and mortar stores are not as accessible in rural areas as they were say, 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?
Opponents imply that the streamlined sales tax effort will “have the effect of widening the so-called “digital divide.” Unfortunately, they fail 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. In truth, if the states fail to simply their sales tax systems and Congress fails to give states that comply with the Agreement remote sales tax collection authority, the consequences will be the greatest for low income Americans who do not have the resources to shop out of state.
Myth: “The Agreement is a good concept but it can never really work.”
Fact: Since the Streamlined Sales Tax System became operational on October 1, 2005, over 1,100 remote sellers have volunteered to begin collecting sales taxes for those states that have complied with the Agreement. The certified service providers were approved in May and even before the certified automated system was online and available to sellers, these sellers had started to collect sales tax and remit those taxes to the states. The Streamlined Sales Tax System is so much simpler that without even the software in place, remote sellers could begin collecting sales taxes on transactions made by residents of these states.