The streamlined sales tax agreement: what it means for business.

To modernize tax administration, it is necessary to simplify the complex rules and regulations that exist today. In some cases, it is not possible to achieve true simplification; where simplification is not possible, the goal must be uniformity. Combining simplifications with the certainty brought by uniformity, technology can be used to create a system that is more reliable, simpler, and less costly to sellers. A modern, technology-enabled system can also bring an improvement in tax compliance.

In November 2002, 31 states took a giant step forward in the effort to simplify the administration of sales and use taxes. At a meeting in Chicago, state delegates approved the initial provisions of an interstate agreement for sales and use tax administration. Through their respective delegates, 30 states voted to approve the provisions. One state abstained, ostensibly because it disagreed with one provision of the agreement--the requirement to adopt one rounding rule by 2006.

State legislators will now consider whether they should enact the provisions that are contained in the agreement. This process has already begun, and many observers feel at least 10 states with 20 percent of the country's population could have legislation in place by summer 2003. Until the states enact these provisions, businesses will not reap any actual benefits, but the importance of the step that the states took last November should not be overlooked. Specifically, sales and use tax provisions were crafted by tax administrators and business professionals and approved by a body consisting of tax administrators, legislators, and representatives from the business community. To obtain consensus among delegates representing 30 states is no small feat. Indeed, it is arguably a victory in itself.

Businesses Stand to Gain Significantly

With enactment of the proposed provisions, businesses of all sizes and across all industries, especially multi-state sellers, stand to gain significantly. The provisions offer many of the simplification principles that businesses have sought for years.

* The provisions offer existing taxpayers a more modern tax collection system that provides more simplification and uniformity, coupled with a greater use of technology.

* The provisions provide a simple voluntary solution for sellers not collecting today that wish to expand their business in areas where they are not currently required to collect tax.

* For businesses concerned about the cost of compliance, a seller that volunteers can receive a tax collection function at no cost, by choosing the Certified Service Provider (CSP) model, or at a low cost, by selecting the Certified Automated System (CAS) model.

The agreement struck in Chicago has numerous provisions that will benefit businesses. Among them are:

Simplified (state level) administration of local sales taxes: The agreement requires central administration of sales and use taxes for the state and the localities in each state. The state tax department can perform the administration, or a body established by the state legislature can perform it. This provision is important to all taxpayers, both in-state and multi-state, since they will only be required to file one return for each state.

Simplified exemption administration: The agreement removes the good faith requirement present in many states' laws concerning sales tax exemptions and provides relief for the seller if the purchaser issues an exemption certificate improperly. This is especially important for businesses that sell products for resale and in instances where a certificate is required. Currently, the seller can become liable for any tax on the purchase where the certificate was issued improperly. With the agreement, the purchaser will become liable and the state will not longer hold the seller accountable, except in the case of fraud.

Simplified rate structure: The agreement limits the number of rates present in a jurisdiction. Each state is permitted one general sale and use tax rate, plus a second rate limited to drugs and food. Each local jurisdiction can have one rate. The agreement also requires local jurisdictions to report all rate changes to the state, and changes can only be effective on the first day of a calendar quarter, with 60 days' notice. This section provides businesses with established notice for local changes and a reduction in the number of rates that must be accounted for in each state. This allows the tax application system utilized by the business to be more accurate and reliable.

Uniform definitions: The agreement contains a menu of definitions. Included among these are product definitions for food and food products, drugs and health care services, and clothing and accessories. The agreement also contains definitions for terms generally found in sales and use tax law, such as tangible personal property, retail sale, and purchase price. While some of the definitions are not simple, they are uniform throughout taxing jurisdictions. The uniformity in definitions will provide more clarity to businesses selling the defined products. For example, some states that exempt food from sales tax exclude soft drinks from the exemption. Today, there are 12 categories used by states to determine whether fruit or vegetable beverages should be classified as soft drinks. These rules are based on the percentage of juice in the beverage. Under the definitions in the agreement, the number of categories will be reduced to one.

Uniform provisions for bad debts: The agreement provides uniform rules for states to follow for a seller to claim a deduction on its tax return for the amount of the bad debt deduction. The deduction is the amount allowed pursuant to the Internal Revenue Code. The deduction is limited to the seller, unless state law allows the deduction to apply to other parties. This provision would eliminate the varied procedures and practices currently used by states, providing one uniform method.

Uniform sourcing: The agreement contains sourcing rules specifying which taxing jurisdiction applies. Over-the-counter transactions where the customer leaves with a purchase are sourced according to the location of the seller. Purchases involving delivery are sourced based on the shipping address. The rules also allow for tax based on the address of the purchaser, if there is no shipping address. Currently, about half the states with local taxes use an origin-based sourcing rule and half use a destination-based rule. One uniform rule will reduce the number of rules that multi-state businesses must follow, simplifying the tax application.

Technology collection models: The agreement contains three certified tax collection and remittance models. The models make a greater use of technology in the tax application and tax collection functions and allow taxpayers options based upon their individual business circumstances. They limit the liability of the seller, or other taxpayer, for uncollected tax due to errors by the certified tax application system, thereby reducing the audit burden of the taxpayer. A taxpayer can select one of the three models, or choose to retain its existing system.

* Model 1--Certified Service Provider (CSP): The CSP is a contractor that provides full-service tax collection for the states. The functions include software for tax application, integration of the software to the seller's products and order processing system, the filing of returns, and the payment of tax collected. The states compensate the CSP for the service. The only cost to or burden on the seller is to provide information on its business practices and processing system so the CSP can make the appropriate integration and notify the CSP when new products are introduced so they can be properly mapped to the tax application software. The seller is relieved of liability for errors in tax application for transactions processed through the system. This model is appropriate for sellers that may be required to collect tax in the future and for others that wish to move their sales tax functions to another party.

* Model 2--Certified Automated System (CAS): A CAS is a tax application system that has been certified by the states. A seller obtains the system and uses it for tax application. The seller continues to be responsible for filing returns and remitting tax collected. The seller is relieved of liability for errors in tax application for transactions processed through the system, which can be a significant benefit to business.

* Model 3--Certified Proprietary System (CPS): This model allows the seller or other taxpayer to maintain its existing tax application system. The system is reviewed by the state and certain portions of the system are certified. The seller is relieved of liability for errors in the portions of the system that are certified. The certifications will include the use of state provided databases for rates and jurisdictions.

Implications for Businesses with Special Tax Rates & Treatments

Although the agreement contains numerous provisions that benefit most businesses, some taxpayers could be negatively affected in certain areas, if they have obtained special rates or treatments on the products they sell or use. The modernization effort is primarily focused on simplification. Businesses should review the provisions and determine the effect on their individual operations. If they are negatively affected in an area, they should work with the applicable states to determine if an alternative is available to obtain the same result.

Overall, the effect of the provisions in the agreement should be positive for the both the business community and for taxing authorities. Representatives of both groups have worked together to produce these provisions. Now is the time to educate more in the business community, so they will be in a better position to judge the merits of the provisions and how they will affect their businesses.

CHARLES COLLINS is Director of Government Affairs for Taxware, a division of govONE Solutions. He previously worked with the North Carolina Department of Revenue for 32 years, serving the last 10 as Director of the Sales and Use Division. He also spent two and one half years as Co-Chair of the Streamlined Sales Tax Project and was a delegate to the Streamlined Sales Tax Implementing States.