SSTP Takes Hold As States Suffer From Internet Sales

by Mike Godfrey, Tax-News.com, Washington

16 March 2005

With 21 US states now having passed legislation to join the SSTP (Streamlined Sales Tax Program), a further ten states well ahead in the legislative process, and virtually all states having announced their agreement in principle, it seems only a matter of time before Congress legislates to make the SSTP's principles compulsory.

Currently the states estimate they are losing over $15bn a year from Internet sales, although much of this relates to uncollectable inter-state sales. The Supreme Court ruled in 1992 that states could not force businesses outside their borders to collect their sales taxes unless the companies have stores or headquarters in those states.

There is no political will to change the situation unless the states do something to alleviate the tangle of more than 9,000 sales tax regulations which make inter-state compliance vitually impossible for businesses. Hence the SSTP, under which the states agree to apply uniform sales tax rules across the nation.

For many states, on-line cigarette sales are particularly hurtful for the tax-base. States like New York (tax of $3.00 a pack) and New Jersey ($2.40 a pack) find tax revenues dropping dramatically as smokers buy from on-line stores.

Cigarettes are a special case, because the 1949 The Jenkins Act requires vendors that ship cigarettes to another state to provide customers' names and addresses to taxing agencies in the receiving state. Most Internet cigarette vendors do not comply with the Jenkins Act, but some do, and their customers are receiving substantial tax claims from their home states - up to thousands of dollars in some cases. New Jersey, Pennsylvania, Ohio and New York City are among the municipalities that are billing residents.

Although 21 states have put the SSTP into effect, collection by sellers of sales and use taxes on anything other than cigarettes remains voluntary under the Agreement until either Congress or the Supreme Court acts to make this collection mandatory.

Under the Streamlined Sales Tax Project, states are required to establish uniform definitions for taxable goods and services, and maintain a single statewide tax rate for each type of product. The project also seeks to simplify tax reporting requirements for online sellers. But while retailers unsurprisingly support the SSTP, businesses in general are lukewarm or hostile to the plan, which they say would impose burdensome new recording and reporting requirements.

The states participating in SSTP plan to entice online merchants to collect sales taxes voluntarily by sharing with them a portion of the tax revenues that they remit, but it's far from clear that this will be enough to persuade a multi-state retailer to keep 45 sets of records. Online sellers would be required to purchase approved tax-calculation software or to certify with the states any in-house calculation systems already in place; or they could choose to outsource tax collection to a certified third-party.

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