States rethink sales tax project
Stalemate: StreamlineThe failure to reach a compromise on the taxation of intrastate sales is causing several states, including Texas, to rethink participation in the multi-state project.
The Streamlined Sales Tax Project (SSTP) began as a joint effort by states to address the growing problem of state and local sales tax revenue losses due to remote sales from e-commerce. Federal law prohibits states from requiring sellers to collect tax on interstate shipments, unless the seller has a physical presence in the state where delivery occurs. The Court ruled that the maze of local and state sales tax laws placed an undue burden on remote sellers, violating the fair commerce clause of the U.S. Constitution.
As a result, states joined together to simplify and standardize the administration of their sales and use taxes across state boundaries, creating the Streamlined Sales and Use Tax Agreement (SSUTA). Adoption of the SSUTA in Texas would change the methods used to determine which local jurisdictions are entitled to taxes due on intrastate sales.
Texas and several other states determine sales tax based on the origin of the sale, which is usually the seller's place of business. The SSUTA requires a seller to charge sales tax based on the destination where a good or service is delivered.
The Comptroller's Revenue Analysis Section estimates that adopting destination sourcing would cause a redistribution of more than $160 million in local sales taxes from larger, urban areas to smaller, suburban and rural areas.
Many Texas cities, including Round Rock, just north of Austin, are resisting destination sourcing. In 1993, Round Rock negotiated a deal to bring the sales operations of Dell Inc. to the city. By 2005, Round Rock generated more than $30 million in sales tax, more than half of its total annual general revenue, from sales by Dell.
"The destination-based method for determining who gets the sales tax revenue will pull the rug out from under us," said David Kautz, Round Rock's director of finance.
Local debt issued in anticipation of future sales tax revenues is one of the key barriers to Texas fully implementing SSTP, Kautz said.
Failed attempts
In 2003, the Texas Legislature took steps to comply with the SSUTA's destination sourcing requirement.Because of the resistance encountered, the Legislature required destination sourcing for taxable services but retained the origin sourcing requirement for tangible personal property. This provided more time for studying the effects of destination sourcing; however, opposition to even partial compliance was strong.
Because of concerns raised by local governments about revenue shifts and the outcry from many business owners about the increased administrative burden associated with reporting sales taxes for nearly 1,400 local jurisdictions, however, the Comptroller's office, at the request of several key legislative leaders, did not implement the new requirements.
Texas is not the only state that has encountered problems trying to implement destination-based sourcing. Recent legislation in Utah repealed that state's destination sourcing requirement and legislation in Ohio would eliminate destination-based sourcing for in-state vendors. The most telling example of the problems is found in Kansas. Kansas changed to destination-based sourcing in 2003; however, on March 24, 2006, the Kansas House of Representatives advised the Streamlined Compliance Review Committee that Kansas is not in compliance with the SSUTA because of problems implementing and enforcing destination-based sourcing. More than 50 percent of the estimated 25,000 businesses affected by Kansas' change in sourcing sales are not collecting, reporting and remitting sales tax in accordance with the new laws; and, due to the difficulties of compliance in a state with more than 750 local sales tax jurisdictions, the Kansas Legislature and the Kansas Department of Revenue have chosen to not enforce destination-based sourcing for sales made in Kansas. In March the Kansas Legislature referred the bill to a committee for further action.
In an attempt to balance the needs of local governments and businesses against the SSUTA's requirement of destination sourcing, Texas proposed an amendment to the SSUTA that would have allowed each state to source intrastate sales as the state chooses, while still requiring destination sourcing for all interstate sales. Ohio proposed a similar amendment that also would have allowed sellers to collect just one rate per state on interstate sales. Despite the difficulties many states face complying with full destination based sourcing, both proposed amendments were defeated by the Streamlined Governing Board. That left states such as Texas questioning whether involvement in SSTP is in the best interest of its citizens.
In fact, of the 36 states that were party to the SSTP in 2000, only 13 were in full compliance when it took effect in 2005 and only six other states are scheduled for compliance by January 1, 2008. The four largest states, California, Texas, New York and Florida, have not fully implemented the SSUTA, and California announced that it will no longer participate due in part to the failure of the member states to address concerns raised by non-member states about the requirements.
Under a voluntary system, the state cannot estimate the amount of new revenue that Texas would receive as an SSTP member state. The state could lose money due to changes in definitions and other administrative requirements. Without a guarantee of a significant amount of new revenue, Texas cannot justify the adoption of destination sourcing. Adopting it would put the financial well-being of local jurisdictions at risk and would substantially increase the administrative burden for Texas sellers by requiring them to collect and report tax for 1,400 local jurisdictions on intrastate sales.
Russell Gallahan and Robin Corrigan
