GFOA of the US & Canada

Issue Brief: Collection of Taxes on Purchases Made Over the Internet/Other Remote Means

Updated January 2010

Although these Court decisions were based on catalog sales and were handed down before the emergence of e-commerce, the rulings extend to all remote sales—including those made over the Internet. Over the past few years, Congress has attempted to overcome the effects of the Bellas Hess and Quill decisions and allow state and local governments to require retailers to collect and remit taxes on remote sales.

The Streamlined Sales Tax Project

To overcome the sticking point in the Bellas Hess and Quill decisions—the compliance burden on vendors—a group of public and private entities formed the Streamlined Sales Tax Project (SSTP) in March 2000 with the goal of simplifying state and local tax systems. More than 40 states joined the SSTP, along with state and local government associations, retailers and retail associations. The participants developed a set of recommendations for the terms of an Agreement that would simplify the multiple sales tax systems across the country and create equity in business practices between “bricks and mortar” and remote vendors.

The first step in moving the Agreement forward was to establish a group of implementing states, the Streamlined Sales Tax Implementing States (SSTIS). On Nov. 12, 2002, the SSTIS officially approved the provisions of the Agreement outlining a uniform system for the administration and collection of all sales taxes – whether collected at a physical location or remotely.

The Streamlined Sales and Use Tax Agreement includes the following provisions:

• Creates a centralized state administration of sales tax collection and the distribution thereof to local jurisdictions;
• Creates an electronic registration system for all vendors;
• Limits state and local governments to a single general sales tax rate per jurisdiction;
• Requires states to create and maintain a database of tax rate information for all taxing jurisdictions;
• Simplifies sourcing rules for all taxable transactions;
• Protects states’ right to exempt any item or service from taxation (e.g., food);
• Uniformly defines goods (e.g., if a state taxes “candy,” it must adopt the Agreement’s definition of “candy”);
• Standardizes tax holidays.
  

A Governing Board comprised of representatives of each member state that has adopted the Agreement, was established to interpret and amend the Agreement, to resolve issues such as binding dates, provisions for state participation and non-participation, and appointment of advisory boards, and to certify the automated systems and service providers. Non-member states may have representatives serve as ex-officio members to the Board, providing important input on various aspects of the Agreement.

On Oct. 1, 2005 the Agreement went into effect for the states that have adopted it through their state legislatures. Retailers in those states, on a voluntary basis, may use the system to collect and remit sales and use taxes for those states. There are currently 19 full member states that are collecting remote sales tax revenues: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, Washington, West Virginia, and Wyoming. Three states are associate member states (those states that have adopted most of the Agreement but are not yet in full compliance) -- Ohio, Tennessee and Utah.

The GFOA, the National League of Cities (NLC), the National Association of Counties (NACo), and the U.S. Conference of Mayors (USCM) have representatives serving on the State and Local Government Advisory Council (SLAC). The SLAC serves to provide technical advice to the Governing Board on matters of the Agreement that impact state and local governments. Its counterpart, the Business Advisory Council (BAC), represents the views of the business community to the Governing Board.

Important Change to Sourcing Rules Adopted in December 2007

An amendment on sourcing rules adopted by the Governing Board in December 2007 significantly impacts state and local governments, especially where taxes are collected at the point of origin rather than the point of delivery. The amendment allows states to chose either to have destination sourcing for all sales or to allow for origin sourcing for all in-state sales and destination-sourcing for all out-of-state sales. The change was adopted in order to help states with origin sourcing laws that have been reluctant to join the Project and adopt the Agreement.

Prior to the Amendment, a state had to adopt destination sourcing for all sales (in-state and out-of-state; in store and remote). Some local governments in origin states were concerned with this provision, since the change to destination sourcing could have brought dramatic sales tax revenue losses. After months of debate, the Governing Board agreed to allow states to choose which type of sourcing to adopt in their state, with the caveat that the new sourcing arrangement would only occur once it has been adopted by five states.

Local Governments’ Interest in the Agreement

While the SSTP and the Agreement address state laws and taxation policy, the GFOA is monitoring specific issues of interest to local governments. These include:

• Amending the Agreement to include the simplification of non-sales and use telecommunication taxes and fees. GFOA opposes having the SST include communication taxes and fees simplification within the Agreement, as it is not within the scope of the SST’s mission, and could be quite harmful to local governments, as it would preempt their current authority to tax communication services.
• Amending the Agreement to include any taxes on hotels and rental cars. Similar to concerns with including communication taxes within the Agreement, these type of taxes fall outside of the SST’s scope. GFOA is concerned that efforts to ‘simplify’ these taxes could result in a federal preemption of a local government’s ability to tax these items.
• Requiring vendors to be compensated for collecting sales and use taxes.
• Implementation and clarification of the sourcing rules.
• Fair remittance procedures from the state to the local government.
  

Federal Legislation

While the Sales Tax Fairness and Simplification Act was introduced in the 110th Congress (S. 34 and H.R. 3396), it is uncertain whether legislation that would mandate that collection of taxes on remote sales will be introduced in the 111th Congress.

The GFOA and local government associations support federal legislation that allows states and localities to collect taxes on remote sales, but remains concerned that the legislation could include provisions that would be harmful to local governments. For example, the call for state and local governments to simplify their telecommunication taxes before they would be able to collect taxes on remote sales is of great concern. The GFOA, NLC, NACo and USCM all have expressed concern that the legislation could limit the ability of local governments to impose taxes and fees on a range of communication services, including rights-of-way fees, per-line subscriber charges franchise fees, and other telecommunication services taxes. Revenues from these fees are a major source of funding for local governments. Additionally, such taxes and fees go beyond the SST’s scope of simplifying sales and use taxes. Local government associations continue to call for communications reform proposals to be separate from remote sales and use tax legislation.

Looking Ahead in 2010

The GFOA will be working closely with the SSTP Governing Board on areas where the Agreement impacts local governments. GFOA also will continue its call for the telecommunication tax provisions to be stripped from pending federal legislation and not be included in the SST Agreement. Our efforts will be coordinated with our partners at NLC, NACo, and the USCM.

Related Public Policy Statements

• Taxation of Remote Commerce (2008)
• Federal Preemption of State and Local Government Taxing Authority (1997)
• State and Local Government Authority Over Telecommunications (1995)
  

Additional Resources

• Streamlined Sales Tax Project: www.streamlinedsalestax.org

GFOA • Federal Liaison Center • (202) 393-8020 • (202) 393-0780 FAX • Email