Hidden costs of the SSTP.

In the states' efforts to capture sales tax on Internet and catalog sales--known as the Streamlined Sales Tax Project (SSTP)--a number of new definitions have been adopted by member states. The purpose is to promote uniformity and to simplify the private administration of collecting public revenues. Several states have taken the opportunity presented by these new definitions to expand their tax base, but in most cases have never mentioned that the new laws implementing the SSTP have increased taxes.

Under the SSTP's "Taxability Matrix" (see www.streamlined salestax.org/taxability%20matrix%2 03-5-04.pdf), the term "sales price" includes the "total consideration ... for which personal property or services are sold, leased, or rented ..." and gives the states the option of including the following as part of the price:

* Charges by the seller for services to complete the sale;

* Delivery charges;

* Installation charges;

* Value of exempt items when bundled with taxable goods or services; and

* Credit for a trade-in.

Tennessee

Prior to adopting the SSTP definitions, Tennessee applied sales tax to separately stated charges for freight only when the risk of loss passed to the buyer at the destination. For example, it did not tax the trucking of crushed stone if the risk of loss for the stone passed to the purchaser at the quarry. In adopting the SSTP definitions, the state faced a dilemma: under the SSTP definition of sales price, there is no leeway to allow an exemption for delivery charges depending on the risk of loss; thus, Tennessee had to choose whether to exempt or tax all delivery charges. The state chose to tax all delivery charges.

After the SSTP definitions become effective in Tennessee (July 1, 2005), the cost of crushed stone will increase:

                   Before    After
                     SSTP     SSTP
Cost of stone      300.00   $300.00
Tax on stone
at 8.25%            24.75     24.75
Trucking           200.00    200.00
Tax on trucking         0     16.50
Total cost        $524.75   $541.25

Not only will the cost of construction increase in Tennessee, but contractors will possibly see an increase in costs not reflected in their bids. The law has no provision for contractors to recover the increased tax paid on contracts signed before the tax increase, but completed after the new law's effective date. Although the state is making changes to enable contractors to recover the increased tax to assure compliance with the SSTP provisions, the SSTP implementing law does not contain an increased tax recovery provision for contractors with existing contracts.

Contractors face a dilemma in bidding on projects started before Tennessee's changes take effect, but completed after the effective date. Adding tax on freight to their bids could cause the bid to go to a competitor that did not include the added cost. Not including the tax increase could negatively affect a contractor's profit margin.

Indiana

Much like Tennessee, Indiana only taxed freight charges if they either were not separately stated or were free on board (FOB) destination charges. (FOB destination means that the risk of loss for the property transfers at the destination.) To participate in the SSTP, Indiana adopted the new definitions (effective starting 2004) and focused on the new definition of "gross retail income," which provides that installation and delivery are included in gross retail income. Prior to this new definition, Indiana had not taxed separately stated installation charges.

The Indiana General Assembly did not specifically exclude delivery or installation from the definition of gross retail income when it adopted the new definition. The legislators, however, left intact a provision that provided that gross retail income was only taxable to the extent the income was from services (e.g., delivery and installation), performed before the transfer of the property. The Indiana Department of Revenue issued a public document (Commissioner's Directive No. 23 (4/1/04)) interpreting the new definition to include all installation or delivery services, regardless of when the services occurred with respect to the property transfer.

To clear up any confusion, the General Assembly passed a law in a special session that clarified the earlier law. The new law, effective July 1, 2004, provided that an installation of property that is separately stated, and occurs after the property transfer, is not taxable. The law also provided that delivery services are taxable and that, in Indiana, delivery occurs prior to a property transfer.

Like Tennessee, Indiana specifically chose to raise the sales or use tax cost on construction. Before the SSTP, Indiana contractors did not pay sales tax on delivery charges for concrete, stone or structural steel. Effective July 1, 2004, the freight charges on construction materials are taxed. Contractors will see a significant effect oil their construction costs, which they will pass on to their customers. There were no articles in Indiana newspapers heralding this tax increase, nor any public debate on the wisdom of increasing the tax burden on the construction industry during an economic recovery period. Perhaps the tax increase was inadvertent. The legislators involved may not have realized the effect.

Conclusion

The SSTP was designed to capture sales and use taxes on catalog and Internet sales. The brick-and-mortar retailers have been active in crafting the debate to suit their desire for a level imposition of tax on all retail sales. Contractors have not been represented in the discussions at the national level. Once the SSTP uniform provisions reach the state legislatures, they cannot be changed significantly. The SSTP does provide a process to challenge whether a state complies with its provisions, but the best time to act is when the states enact these laws. When a legislature is faced with the choices that faced Indiana and Tennessee, adversely affected taxpayers need to speak out or work through their trade organization lobby groups or their local representatives, to let the legislature know that a tax increase will not solve their state's fiscal woes.

FROM JEFF GREENE, J.D., CMI, INDIANAPOLIS, IN, AND KIRK LOW, CPA, NASHVILLE, TN