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February 2, 2010
Has the SSTP Become Overburdened?

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By Frank Shafroth

Have you thought about the effect imposition of a value added tax could have on streamlining efforts? Have the meandering streamliners delayed so long that they'll have to stand on the sidelines and watch other events overtake them? And could states suffer a worse fate than if they had sucked it up and accomplished their task in a timely manner?

It has been more than a decade since, as Prof. Walter Hellerstein wrote me, state policymakers and tax professionals recognized that "something had to be done about a Depression-era sales tax as we moved into the digital age." And the digital age has implications for any concept of a physical presence. As former Utah Gov. Mike Leavitt once pointed out, the question was really whether the sales tax is a viable source of revenue for the 21st century. He believed we cannot expect the sales tax to endure if one group of retailers is required to collect it and another significant group of retailers is not.

But now we wonder if the streamlining effort has gone awry.

State tax collections nationwide declined by 10.9 percent during the third quarter of 2009, the third consecutive quarter during which tax revenue fell by double-digit percentages. The first three quarters of 2009 marked the largest decline in state tax collections since at least 1963. For the fourth quarter of 2009, early data showed continuing declines.1 Local governments have seen their sales tax revenue take another hit: 64 percent of city officials report sharp declines in retail sales, and 57 percent report a significant increase in retail store closings. Those closings affect not only sales and use tax revenue but also commercial property tax revenue.2

Should we consider whether the Streamlined Sales Tax Project process is working, can work, or is overburdened?

Whither the Sales Tax?

In 2007 John Mikesell said that sales and gross receipts taxes were the largest source of own-tax revenue in states and accounted for one-fourth of state general revenue.3 But even in the prerecession days, there were forces of change afoot, with Ohio introducing a low-rate gross receipts tax in addition to its existing retail sales tax and Illinois considering replacement of its sales tax with a gross receipts tax.4 And the managing editor of State Tax Notes last month said the most important "new" tax of the decade was the "Amazon" law.5

The SSTP's ultimate success will depend on participation by more states and congressional approval. Thus, the success of the SSTP and the viability of the sales tax as a 21st-century source of government revenue are yet to be determined.

What Led to the SSTP?

I asked several people who were with the streamlining project in the beginning how it came about.

Will Rice, who is now with Fast Enterprises, but has been director of Washington state's Department of Revenue, responded:

      I always remember the first time I heard Dan Bucks expound about the Zero Burden [for remote vendors collecting sales taxes] concept. It was on June 21, 1999, at a restaurant in Williamsburg, Virginia. [Virginia] Governor [James S.] Gilmore had just kicked off the opening meeting of the ACEC [Advisory Commission on Electronic Commerce], and it was already clear the Commission was going to be a disaster. Over dinner with Ray Scheppach, Harley Duncan, and myself, Dan described his strategy. We didn't need Congress. The 45 states would all work together to simplify the sales tax. Using simplification, technology, and vendor compensation, we would reduce the collection burden on retailers to zero. . . . I was in awe. Because I thought this possibly the stupidest idea I had ever heard (I have since told Dan exactly what I was thinking that day). Having spent the previous year trying to harmonize the sales tax of three states — Washington, Utah, and Idaho — I thought Dan's idea was impossible. But being the junior player at the table, I kept my mouth shut. . . . Suffice it to say, today I am impressed with Dan's vision and the progress the states have made. It may feel as though the project is crawling at times, but the states have made more progress than almost anyone expected was possible.

Stephen P. Kranz, who was then with the Council On State Taxation and now is with Sutherland, Asbill & Brennan LLP, and was one of the early SSTP collaborators who is still deeply involved in streamlining, said the project's success depends largely on its ability to draw and keep the interest of three groups: state legislators, tax administrators, and affected businesses. Unfortunately, the interests of those three groups are not always aligned, leading to friction over the appropriate course of action and ultimately to disappointment among the stakeholder groups.

A good example of that is sourcing, Kranz said. While the business community and state tax administrators early on concluded that uniform destination-based sourcing was the right technical solution and the right balance to a sales tax system, member states recently agreed to allow origin sourcing as an alternative to keep some states on board and attract new states.

Critical streamlining successes that remain despite the erosion of the Streamlined Sales and Use Tax Agreement include the uniform definitions, uniform rounding rule, elimination of good-faith exemption certificates, the drop shipment rule, and the hold harmless provisions, such as those for certified service provider software, Kranz said.

I asked several tax professionals whether the governing board's decision to allow origin sourcing deviates from the original intent of the agreement and whether it strengthens or weakens the agreement in the eyes of interested parties.

Walter Hellerstein of the University of Georgia said, "Of course it deviates from the original intent, and it weakens the agreement in the eyes of many stakeholders, but politics is politics and money is money, and the locals that rely on local sourcing don't want to give it up." Diane Hardt of the Wisconsin Department of Revenue, an early SSTP participant, said that those working on the SSTP studied all possible sourcing rules and concluded that destination sourcing was the only reasonable sourcing method in a remote commerce environment. "If you went with origin, businesses would establish themselves in a state with no sales/use tax," she said.

Hardt believed adopting a second sourcing method added a lot of complexity to the system:

      I think the preference of most would have been to stick to the original feature of one uniform sourcing rule, which was destination-based sourcing. Some states worked destination sourcing through their political systems and stakeholders. However, the decision-makers were feeling pressure to involve additional states to keep the momentum going. Stakeholders are divided about whether this origin-based sourcing strengthens or weakens the agreement. It seems it will only strengthen if additional states do indeed participate and make the other simplifications. That hasn't happened to date.

But Kranz said:

      The failure to provide for a uniform destination-based sourcing regime is a fundamental failure of the simplification effort. I agree with those that think this was a foundation stone of the agreement and the stone has been eroded. While many stakeholders recognize the political reasons why the governing board made an allowance for origin sourcing, the decision sanctions an unconstitutional rule as part of the agreement. While it has allowed a couple states to maintain their associate membership, it has damaged the credibility of the whole effort.
Application to Other Taxes

It is often said that the U.S. Supreme Court's Quill decision formed the basis for states to undertake the streamlining effort. Quill addressed only the imposition of sales and use taxes, but there have been attempts to expand SSUTA to apply to other taxes. I asked for several opinions about adding other taxes.

Hardt replied that those efforts have added to the project's complexity and detracted from what needs to be done to address remote commerce. But Charles Collins, an early cochair of the SSTP, said that the project has added only telecommunications taxes and that in some states, telecommunications taxes were reported as or with sales and use taxes.

Hellerstein said, "The more uniformity, the better," but added that the more uniformity, the more difficult the task of bringing states together.

Kranz said:

      Transaction tax regimes adopted by state and local governments in the last century should be updated to ease the burden they impose on interstate and intrastate commerce. As the economy continues to evolve such that consumers buy more products and services from remote sellers, these other tax regimes face the same level-playing field problem that has caused the erosion of the sales tax base. Only if these other taxes [such as telecom taxes] are simplified can the states and locals hope to maintain their tax base.
Still Trying to Reach Agreement

States and the business community continue to try to reach agreement on several critical issues, including vendor compensation and telecommunications taxes. It seems that Congress may be reluctant to introduce federal legislation to support SSUTA unless states really agree on some of those issues. What are the most important steps that streamlining proponents must take in the next six months to regain momentum on Capitol Hill?

Harley Duncan, formerly executive director of the Federation of Tax Administrators and now with KPMG LLP, said the vendor compensation, telecom, and other issues that are extraneous to streamlining itself have been "shoehorned" into the federal legislation.

Kranz said: "The momentum has stalled as a result of efforts to renegotiate language and issues that have been in the bill since 2003 — vendor compensation, communications tax simplification, and the small business exception are all critical issues that need to be put back to bed before the legislation is introduced and gains support."

Collins said that agreement between the tax organizations and the business community on vendor compensation is necessary to be able to move legislation in Congress: "There are many companies that oppose action in Congress. One of the most important steps for stakeholders is to educate members of Congress and members of their individual state legislatures so all of the information on both sides of the issues will be understood and an informed decision can be made."

Hardt urged SSUTA proponents to just get on with it: "Introduce the federal legislation even if it means finding different sponsors. Stakeholders will be more motivated to resolve issues if there is the ability to collect sales taxes on remote commerce. States and local governments need the revenue."


I asked whether the streamlining effort will ultimately be successful.

Hellerstein essentially summarized the responses, saying it depends how one measures success. "There is already some success in harmonization and simplification, though probably not enough for congressional blessing," he said.

Collins said:

      The effort has already been successful in simplifying the administration of many areas in sales tax compliance, introducing more uniformity in compliance and utilizing greater use of technology. Therefore it has been successful, and as more sellers use systems that have been tested and certified by the states, and as more states join the effort, it will improve compliance. There are still additional areas that can be improved with simplification, uniformity, or technology, and some of the areas that have been addressed may take more work. As to whether it will be successful in Congress, that remains to be seen. There has been more progress made on simplification and in government and business working together [on streamlining] than in any other sales tax project. In addition, there has been a significant amount of new revenue collected from volunteer sellers.

Utah Tax Commissioner Bruce Johnson, a streamlining participant, said:

      The only reason we had any meaningful prospect of getting federal legislation was going to be if we had the support of the business community. It seems possible that if we had convinced them they would get rate equality — if not simplicity — they would be strong supporters. We thought it necessary to address the retailers' problem. But then we sort of switched from the retailers to the GEs of the world, who were in it to get their own (so [they adopted] take it or leave it positions), so that suddenly we had additional players at the table without an overall interest in the goals of the project, something that significantly changed the dynamics. Then there were important players who were not at the table — the direct marketing folks, who have been effective at blocking progress behind the scenes.

Asked what it might take to obtain congressional approval, Johnson replied:

      First, I would identify the businesses that are really fighting or opposing the SSTP to try and gain an honest perspective. There are some for whom, no matter what we did to address their issues or concerns, would still oppose federal support, like the visceral antitaxers. But there might be others with whom we could work to address their concerns in such a way they would realize sufficient benefit to want to see congressional action. Second, I would go to one rate per state. I would do that with the apprehension that local governments might react so adversely that it would jeopardize positive federal action. In some ways, the locals are like General Electric — they have certain relatively nonnegotiable bottom lines, but other than that are not fully committed to federal action. Third, if I were emperor, I would find a Mike Leavitt — someone with the vision, understanding, strategic sense, and influence to get the states and businesses inspired enough to make some of these hard choices.

Hellerstein said that another couple of years of fiscal distress, and perhaps the threat of a federal VAT, will make uniformity a greater priority for states, thereby helping them get congressional approval for streamlining legislation, even if some "sacred cows (for example, local-origin sourcing) [have] to be slaughtered."

Duncan said some of the basic questions should be revisited, because he has observed the process bog down in detail and states' growing emphasis on minimizing SSUTA's effect on their tax systems. He asked:

    • Was it right to try to deal with all taxpayers rather than just setting up a system for remote sellers?
    • Was it right to eliminate the option of "one rate per state"?
    • Did the right kind of people come to the table and stay there?

Johnson said:

      The local sourcing to me has been very frustrating because it is essential to reducing the burden. I thought we were going to get to a certain level of simplicity and uniformity — because everyone has been adamant about that — but the more we try, the harder it gets. We begin reversing course and moving to complexity; we become bogged down in market competition; we get caught between retailers' tax people versus their marketing people — so that when the vendors became riled up and demanded we eliminate state sales tax holidays and we began to initiate steps in that direction, the marketing people went bonko and [merchants] told us that they weren't really serious about eliminating state sales tax holidays.

Kranz went to the heart of the matter, asking how Amazon law provisions affect the SSTP. He saw them as a threat to the project: "States may be tempted by the promise of easy money — no simplification required. In the end, these bills promise to undercut state efforts to simplify."

If one takes Prof. William Fox's most recent numbers and looks at the estimates of the cost of vendors' compensation, and compares what's left with the state revenue possibilities under New York's Amazon law,6 it might be that the added flexibility and potential revenue that would come from pursuing an Amazon law would merit more time and resources than waiting for Congress to help streamline state and local sales tax systems.

* * * * *

The Tax Doctor is by Frank Shafroth, former chief of staff to U.S. Rep. James P. Moran, D-Va.


"Recession or Not, State Tax Revenues Drop," Nelson Rockefeller Institute of Government, Jan. 7, 2010.

2 Christiana McFarland, "State of America's Cities Survey: Local Retail Slowdown," National League of Cities, March 2009.

3 John Mikesell, "State Gross Receipts Taxes and the Fundamental Principles of Tax Policy," State Tax Notes, Mar. 5, 2007, p. 615, Doc 2007-2972 , or 2007 STT 44-4 .

4 Michael Smart and Richard M. Bird, "The Impact on Investment of Replacing a Retail Sales Tax With a Value-Added Tax: Evidence From a Canadian Experiment," National Tax Journal, p. 591, Volume LXII, No. 4, December 2009.

5 Russell A. Cox III, "State Troubles Will Continue Into the Next Decade," State Tax Notes, Dec. 21, 2009, p. 833.

6 "The Amazon law raised approximately $53 million in New York state and local sales and use taxes during the three quarters it was in effect in fiscal 2008. For the fiscal year ending March 31, 2010, it is expected to raise $70 million. When the law took effect in 2008, the New York Department of Taxation and Finance implemented procedures to identify the retailers that registered as sales tax vendors because of the new law and to track their sales tax remittances. Consequently, we believe the revenue figures cited above." Robert D. Plattner, deputy commissioner of the Office of Tax Policy Analysis, New York State Department of Taxation and Finance. "Amazon' Law Expected to Raise $70 Million for Fiscal 2009," State Tax Notes, Dec. 7, 2009, p. 756, Doc 2009-26403, or 2009 STT 232-6 .


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