Streamlined Sales Tax Moving Closer to Implementation
By Michael Baker & Ralph Hord
Tax Consulting
Universal Advisor, 2004 Issue No. 2


The Streamlined Sales Tax Project (the Project) is an effort by state governments, with input from businesses, to capture lost tax revenue while simplifying and modernizing sales and use tax collection; 42 of the 45 states imposing a sales tax and the District of Columbia are involved in the Project.

The Project is a response to the tremendous growth of catalog and Internet retailers, who often enjoy a distinct price advantage over traditional “Main Street” retailers that must collect sales tax — an advantage that translates into approximately $4 billion per year in lost state tax revenue. Its objectives are focused on improving sales and use tax administration systems for both “Main Street” and remote sellers in all types of commerce.

Key Objectives

The Project proposes that states change their sales and use tax laws to conform with the objectives proposed by the Project; thus, the changes would apply to all sellers. These changes include:

• Uniform definitions within tax laws. Legislatures still choose what’s taxable or exempt in their states. However, participating states will agree to use the common definitions for key items in the tax base and won’t deviate from these definitions.

• Rate simplification. States will be allowed one state rate and a second state rate in limited circumstances. Each local jurisdiction will be allowed one local rate.

• State-level tax administration of all state and local sales and use taxes. Each state will provide a central point of administration for all state and local sales and use taxes and the distribution of the local taxes to the local governments. A state and its local governments will use common tax bases.

• Uniform sourcing rules. The states will have uniform and simple rules for how they’ll source transactions to state and local governments. The uniform rules will be destination/ delivery-based and uniform for tangible personal property, digital property, and services. Special sourcing rules will be developed for unique industries.

• Simplified exemption administration for use- and entity-based exemptions. Sellers are relieved of the “good faith” requirements that exist in current law and won’t be liable for uncollected tax. Purchasers will be responsible for paying the tax, interest, and penalties for claiming incorrect exemptions. States will have a uniform exemption certificate in paper and electronic form.

• Uniform audit procedures. Sellers who participate in one of the certified Streamlined Sales Tax System technology models will either not be audited or will have limited scope audits, depending on the technology model used. The states may conduct joint audits of large, multistate businesses.

• State funding of the system. To reduce the financial burdens on sellers, states will assume responsibility for funding some of the technology models.

• Petition to Congress. The implementing states wish to petition Congress to eliminate the physical presence nexus requirements and require all sellers to collect and remit sales tax.

How Does This Affect You?

Sellers without a physical presence in a particular state aren’t deemed to have “nexus”; therefore, they’re not currently required to collect sales and use taxes. However, as noted in the objectives, the states desire to petition Congress to enact legislation to remove the physical presence nexus requirements. This change would require all sellers to collect the appropriate sales tax from a customer regardless of where the customer is located. For example, a seller located solely in Ohio who sells goods to multiple states isn’t currently required to collect sales tax on sales outside of Ohio. However, if the physical requirement were removed, this same seller would have to collect and remit sales tax based on the customer location, even if the customer isn’t in Ohio.

Therefore, if this project succeeds, the overall landscape of sales tax collection will be changed, and single-state sellers will have to deal with the collection and remittance of tax on all sales — no matter what the location of the customer. This will significantly increase the compliance burden of the sellers and will require them to implement more sophisticated systems quickly.

* Currently, approximately 20 states have enacted all or part of the conforming legislation. Illinois and Michigan have enacting legislation pending, and Ohio has enacted conforming legislation, which is effective Jan. 1, 2005.