States continue quest for simple sales tax: watching millions in revenues slip away on Internet sales, states have to simplify and coordinate their various tax systems with an acceptable, universal way to collect sales taxes.

Williams, Graham

Forty-four state legislators, revenue officials and retailers met in Salt Lake city, Utah, late last November to take the next step in an unprecedented effort to simplify state sales tax systems.

The occasion was the first meeting of the first 23 states to pass model streamlined sales tax laws. Their immediate task in Salt Lake City was to adopt operating rules, elect officers and agree to a work plan. Their ambitious goal over the next few months is to approve a final interstate agreement that legislatures will consider beginning as early as this fall.

"The progress we have made is simply extraordinary," notes Tennessee Representative Matt Kisber, one of the key figures in the effort. "There are now 28 states with over half of the country's population engaged in these talks. Of course, it's too early to gush about how far we've come. We are now down to some of the hardest issues."

The streamlined sales tax movement is the response of state officials and members of the private sector to the billions of dollars of Internet sales that occur each year. The Supreme Court ruled in two cases--National Bellas Hess in 1967 and North Dakota vs. Quill in 1992-- that a state cannot force an out-of-state retailer to collect sales tax on purchases shipped into that state. The court acknowledged that the buyer owes the tax; however, the company making the sale is not obligated to collect it. Translation: A teacher in Kearney, Neb., goes online to buy a pair of gloves from Land's End in Wisconsin. The teacher owes the 6 percent sales tax to Nebraska, but neither the Legislature nor the state's revenue department can force Land's End to collect it. Because this teacher and millions of other consumers do not "'fess up" and remit the money, state and local governments lost as much as $13 billion last year in uncollected sales and use taxes--a number that is expected to triple by 2006. And retailers who c ollect sales taxes feel put upon because they are forced to add it to a consumer's bill while out-of-state competitors are not.

The court left open the possibility of reversing itself if state sales tax systems were changed to meet certain conditions. The key condition? Eliminating the administrative burden that most state and local sales tax systems impose on out-of state retailers. The court reasoned that it is an undue burden on interstate commerce for remote sellers to keep up with the various sales tax structures of 46 states and the thousands of local jurisdictions that have these taxes. State legislators, governors and revenue officials view simplification as a road map for convincing either Congress or the courts to overturn the two decisions.

They have taken the rulings as an invitation to streamline and simplify state and local sales tax systems--to make them less complicated and less burdensome for consumers and retailers. The Salt Lake City meeting was the culmination of the first phase and the beginning of the next stage in this long-term effort.

Work began in late 1998 when the executive committee of the National Conference of State Legislatures created a task force on State and Local Taxation of Telecommunications and Electronic Commerce. A little over a year later, the task force endorsed model legislation that directed state revenue departments to enter into multistate discussions to develop a simpler and more uniform system of sales and use tax collection. Thirty-two states formally joined these discussions, called the Streamlined Sales Tax Project (SSTP). In January 2001, SSTP and the NCSL task force endorsed different, but complementary versions of a model sales tax simplification act. Wyoming and Utah, two months later, became the first to pass versions of the model act. At press time, 28 states had joined them and are now participating in the next phase of the simplification process that began with the meeting in Salt Lake City.

The goal of the representatives of the 28 states--called the "implementing states"--is to approve an interstate agreement on sales tax simplification. If approved by three-fifths of the implementing states, the agreement would be sent to legislatures for consideration. Leaders of the simplification movement hope that enough states will adopt the agreement to encourage major Internet sellers to begin collecting sales taxes in those states. Success of the early states, then, would encourage even more legislatures to adopt the simplification agreement.

"No one knows exactly what will happen at that point," explains Illinois Senator Steve Rauschenberger, co-chair of NCSL's task force. "The best opportunity will likely be convincing Congress that the streamlined system reduces burdens on remote sellers and that the streamlined states should be allowed to require out-of-state retailers to collect the taxes. We hope that sellers using the new system will help us make this case. The other possibility is that the Supreme Court would decide that the streamlined states have eliminated the burden cited in the Quill decision."

Appointees from the implementing states adopted rules and elected Kisber and Utah Revenue Commissioner Bruce Johnson as co-chairs at the Salt Lake City meeting. In subsequent meetings, they began to adopt various provisions of the agreement--including uniform tax returns, limits on rate changes, state administration of state and local sales and use taxes, seller registration, privacy protections, uniform sourcing rules and uniform definitions of food. On the schedule for upcoming meetings are such critical and controversial items as sales tax holidays, caps, thresholds, rates, uniform definitions for goods like clothing and software, and governance of the agreement.

Kisber acknowledges that the implementing states have saved some of the hardest issues for the end of their timetable. "We have made great progress at the first meetings," he says. "We hope to use the momentum and good will we have established at the early sessions to help us resolve the last three or four difficult items."

Rauschenberger claims that those last items--for example, food definitions and variations in local rates--are hard, but not intractable. "They are hard because they are so ingrained in the way each state's sales tax system has evolved over the years. I am optimistic that they can be resolved, though, because there are so many major players--Main Street merchants and big multistate retailers like Sears and WalMart--who want to level the playing field."

The implementing states plan to finish the agreement this summer because a few legislatures may want to take it up this fall. Most others would consider it in their 2003 sessions. "By July or August," says Kisber, "we should know whether this ambitious cooperative effort is continuing to bear fruit."

For a more detailed explanation of the sales tax simplification issue, see the May 2001 issue of State Legislatures. To track the progress of the implementing states, go to www.streamlinedsalestax.org or www.ncsl.org

RELATED ARTICLE: CONVINCING CONGRESS

In its Bellas Hess and Quill decisions, the U.S. Supreme Court noted that Congress has the authority to allow states to require out-of-state sellers to collect sales and use taxes. Recent attempts in Congress to do that have been tied to a separate issue--the question of whether state and local governments can impose taxes on Internet access fees, the monthly fees Internet service providers charge their customers.

Congress adopted the Internet Tax Freedom Act in the fall of 1998 that imposed a three-year moratorium on taxation of Internet access fees. The act also created a federal commission that was to make recommendations to Congress on electronic commerce tax issues. The commission, chaired by then Virginia Governor James Gilmore, held six meetings, but was unable to reach agreement on any proposal on Internet sales taxes.

Throughout the year leading up to the expiration of the moratorium, a group of U.S. senators, led by North Dakota Senator Byron Dorgan and Wyoming Senator Michael Enzi, tried to forge consensus on a bill that would have allowed states to collect taxes on out-of-state sales after a sufficient number had enacted a streamlined system. Their intent was to tie this bill to legislation extending the moratorium on taxes of Internet access fees.

Negotiations intensified as the expiration date--Oct. 21, 2001-- drew near. The National Conference of State Legislatures and the U.S. Conference of Mayors tried to alter several provisions in the Dorgan-Enzi bill. The sponsors, though, were trying to balance the mayors' and legislators' concerns with those of other interests. In the end, Enzi and Dorgan were unable to make the changes NCSL and the mayors were seeking.

At the same time, other members of Congress, including Virginia Senator George Allen, California Congressman Christopher Cox and Virginia Congressman Bob Goodlatte, were advancing bills that would have permanently extended the moratorium on taxation of Internet access fees. With a few weeks remaining before the original moratorium was due to expire, NCSL leadership decided to seek support for a compromise--a simple extension of the moratorium for two years.

"We weren't making headway on the bill our friends wanted, and we feared the consequences of a permanent moratorium," says NCSL President Stephen Saland. "Our choice was to extend the moratorium to give states--the implementing states--a chance to simplify sales taxes on their own."

Over the course of a couple of weeks, NCSL, led by Illinois Senator Steve Rauschenberger and Tennessee Representative Matt Kisber, was able to line up support for the two-year extension from among diverse interests, including some private sector groups and, quietly at least, the White House. After the House adopted the simple extension in October, the Senate followed suit in November. President Bush signed the legislation Nov. 28.

"This strategy is risky," notes Senator Saland. "But it shows the faith that the organization has in the streamlining movement and the implementing states. We have less than two years now to demonstrate to Congress that states can do what it takes to simplify their sales tax systems."

Carl Tubbesing, NCSL's deputy executive director, heads its Washington, D.C., office. Graham Williams is an NCSL expert on sales taxes and telecommunications taxes.