State Network to Collect Cross-Border Sales Tax

State Network to Collect Cross-Border Sales Tax
September 1, 2005

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

An 18-state network for the voluntary collection of taxes on goods sold over the Internet or through the mail has been created by the Streamlined Sales Tax Project (SSTP), a step project members hope will lead to a national sales tax collection program.

At a June 30 meeting in Chicago, project officials, including state lawmakers and industry representatives, decided 11 states would oversee the network and provide incentives for retailers to participate voluntarily. Incentives would include free software to calculate, collect, and remit taxes on Internet sales and a one-year amnesty for companies that may owe taxes on past online sales to any of the participating states. The software and amnesty would be offered beginning in October.

"This was a landmark meeting for the whole effort," said Stephen Kranz, a spokesman for the SSTP and tax counsel for the Council on State Taxation, an industry trade association that is promoting the project.

The 11 states--Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, North Carolina, Nebraska, Oklahoma, South Dakota, and West Virginia--have amended their sales tax laws to comply with project rules and definitions of taxable items. Six of the seven other states in the network--Arkansas, North Dakota, Ohio, Tennessee, Utah, and Wyoming--have not made the necessary amendments but plan to do so.

The remaining state, New Jersey, brought its sales tax law into project compliance after the June 30 meeting. It did not fully comply, however, until after the 11 states were designated to oversee the network.

Internet and mail order retailers that agree to collect and remit taxes will do so for sales originating in any of the states that have amended their laws to fully comply with the SSTP standards. "Originating" refers to the location of the buyer.

The National Governors Association and National Conference of State Legislatures released a report in July 2004 that estimated state and local governments lost as much as $16 billion by not being able to tax Internet sales.



No Longer Needed?

Some taxpayer groups doubt the need for the SSTP.

"The SSTP was started by states that feared they would lose revenue to Internet sales. Since then, there are now software solutions that even a one-person business with a Web site can get to compute sales tax in every ZIP Code in the country," said William Ahern, spokesman for the Tax Foundation in Washington, DC.

"So in one sense the SSTP is obsolete," Ahern said. "The need for it is gone. No state should bother trying to change its tax rates or sales tax rules to accommodate some other states, because the private marketplace has solved the problem."

One company that offers such a solution, and has been certified by the SSTP, is Avalara Inc., based in Bainbridge Island, Washington.



Technology Seen as Solution

"From my perspective, the simplification is in the technology," said Rory Rawlings, Avalara's founder. "No matter how simplified they make the laws, they're still very complicated for small business owners to comply with. The answer is in technology and not in policy."

Rawlings said his company's Web-based product, which works with most small-business accounting software packages, starts at $9.95 a month. Prices climb from there, depending on the number of sales transactions a business makes each month.

As an SSTP-certified vendor, Avalara Inc. is responsible for the accuracy of the tax collections and remittances, Rawlings noted. Any mistakes would be covered by Avalara. That holds true for other certified vendors as well. Seven vendors have been certified already.



Others Doubt Technology

Rich Prem, director of global indirect taxes for Amazon.com, said, "Technology isn't a silver bullet to resolve the real administrative burdens facing both large and small Internet sellers. I believe that the real benefit of the technology solutions being developed by companies like Avalara will be to enable even the smallest of Internet sellers to be able to collect sales tax on Internet sales, once the more than 7,600 sales and use tax regimes are appropriately streamlined."

He added, "Amazon's position is that if the system is truly simple, and if the states follow through on their commitments relating to certified service providers and certified automated software that would largely eliminate the costs and burdens of collecting sales taxes, then sellers of all sizes should be able to comply."



Loss of Tax Competition Feared

Ahern said he fears nationwide enactment of the SSTP would reduce tax competition between states or between communities within states. In Chicago, Illinois, for instance, the sales tax climbed to 9 percent on July 1. In many Chicago suburbs, the tax rate is 6.5 percent.

"That 6.5 percent rate helps restrain Chicago's rate," Ahern said. "The city's rate would probably be even higher if the suburbs' rates were higher."



States Keep Sovereignty

Kranz, though, said tax competition would remain under the SSTP.

"The agreement says wherever a product is delivered is the jurisdiction that gets to impose the tax," Kranz said. "A jurisdiction could tax something or not tax it. And the tax could be whatever the jurisdiction wants."

Alaska, Delaware, Montana, New Hampshire, and Oregon do not have state sales taxes and would not have to impose them under the SSTP. (Some Alaska communities have their own local sales taxes.)

Without a destination-based tax system, Kranz said, "every company that sold online should set up in one of the states without a sales tax. Some people think an origin-based system is a good approach, because companies will relocate where there is no tax. We think it would be a race to the bottom."


Steve Stanek (stanek@heartland.org) is managing editor of Budget & Tax News.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)