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States Will Begin To Ratify SSTP In The New Year

by Mike Godfrey,, New York

19 December 2002

After 31 states endorsed the Streamlined Sales and Use Tax (SSTP) Agreement in November, state legislatures will begin considering enabling legislation as early as January; more than a dozen are expected to approve the pact in 2003, and that's more than the minimum of ten states which will bring the program into effect in all 31 states.

SSTP, which for four years has been inching its way towards a multi-state platform that would allow major simplification of the United States' 9,000 different sales and use tax regimes, will apply to all sales, whether on the Internet or not, but won't lead to cross-border taxation on the Internet until Congress removes its ban on cross-border sales taxes. In 1992, the US Supreme Court ruled in Quill Corp v. North Dakota that requiring a business without some physical nexus to a state (say, a store or warehouse) to collect that state's taxes puts an unconstitutional burden on interstate commerce.

Then there's the moratorium. The existing tangle of different regimes makes design of an Internet sales tax system an impossible nightmare, and is one of the main reasons that Congress extended the national Internet sales tax moratorium for a further two years until September, 2003. Back in 2001, when the states were still reaping the tax harvest of the booming economy, Congress turned a deaf ear to their arguments against the moratorium.

This time, with the states facing a $30bn deficit in 2003 and Internet sales now representing a significant and fast-growing proportion of sales revenue, there is not much chance that the moratorium will be extended again. The US General Accounting Office has estimated states will lose more than $13 billion each year on untaxed Internet transactions, and the figure is expected to more than triple to $45 billion by 2006.

Under the Streamlined Sales Tax Project proposal, states would be 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.

Given that the federal government is likely to have to pick up at least some of the tab for the states' deficits if they can't extend their tax base, the administration will probably support congressional action this year, but the fate of such legislation depends, in part, on what position big-business lobbyists take. The Council on State Taxation (COST) wants Congress to accompany any repeal of Quill with an affirmation that the states can't levy other taxes - such as a corporate income or franchise tax - on companies without facilities in a state. Joseph R. Crosby, COST's legislative director, warns that even a business-state deal might not be enough. He says, "The anti-tax wing of the Republican Party will make it a challenge to get the House to approve any plan, even if there is an agreement between the states and business. So despite our best intentions, we may be stymied because of the ideological considerations."

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