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Streamlined Sales Tax Proposals Released.

States working to devise a simplified sales and use tax system for nationwide adoption unveiled a set of working proposals in September 2000. The Streamlined Sales Tax Project, which has been meeting for the past seven months, represents a major effort by state governments to design, test, and implement a simplified sales tax collection system that addresses sales tax compliance and administration issues arising from traditional and electronic commerce transactions.

The Project is composed of a steering committee and work groups addressing four broad substantive areas:

* Tax Base and Exemption Administration

* Tax Rates, Registration, Returns, and Remittances

* Technology, Audit, Privacy, and Paying for the System

* Sourcing and Other Simplifications

Thirty-nine states, plus representatives from local governments, are participating directly in the Project. In addition, the work groups invited private-sector representatives to participate in the meetings, review work products, and provide feedback on various proposals. Similarly, the steering committee engaged in discussions with retailers, retail trade organizations, and other interested parties.

The key features of a streamlined sales tax system include:

* Uniform definitions within tax bases.

State legislatures will still determine whether items are taxable or exempt, but will employ nationally uniform definitions for ease of classification of the items.

* Simplified exemption administration for use-and entity-based exemptions.

Sellers will be relieved of the "good faith" requirements under current law and will not be liable for uncollected tax. Instead, purchasers will be responsible for supplying correct exemption information and will also be liable for underpayments arising from erroneous exemption claims.

* Rate simplification.

States will be responsible for administering all state and local taxes and paying the local tax component to the local governments. A state -- and local governments within the state -- should adopt common tax bases and accept responsibility for providing notice of rate and boundary changes. States will also be encouraged to simplify their state and local tax rates and be responsible for providing accurate information permitting retailers to match addresses within the state to the appropriate local tax rate. Retailers relying on the state-supplied data will be held harmless for errors.

* Uniform sourcing rules.

The states will adopt uniform sourcing rules for sales of property and services.

* Uniform audit procedures.

Depending on the technology model adopted, sellers either will not be audited or will be subject to a limited scope audit.

* Paying for the system.

To reduce the financial burdens on sellers, states will assume greater responsibility for implementing the streamlined sales tax system.

Each of the work groups wrestled with a number of issues and released recommendations relating to its area of responsibility. For example, the work group focusing on technology matters developed a proposal to permit sellers to select from one of four technology models. Under Model One, a certified service provider will perform all of the seller's sales tax administrative functions.(1) Under Model Two, a certified automated system will perform selected tax compliance processes or functions, e.g., the tax calculation function, and the scope of the uniform audit procedures will be correspondingly diminished. Under Model Three, a seller can elect to have its system certified by the states; generally, only larger, nationwide sellers that have developed a proprietary sales tax software system are expected to select Model Three. Finally, under Model Four, some sellers may opt to retain their current systems and enjoy a limited range of sales tax simplification benefits.

The work group examining tax rates, registration, returns, and remittances was charged with developing proposals to minimize differences in the states' administrative practices, including tax rates. The group recommended:

1) imposing restrictions on state and local governments' ability to change sales and use tax rates;

2) implementing uniform administrative procedures and methods;

3) shifting administrative burdens to the states where multiple tax rates are retained; and

4) increasing the use of technology in order to reduce retailer burden.

The group also recommended the development of a centralized electronic registration process for retailers that volunteer to participate in the streamlined system. Similarly, the group recommended developing a simple electronic filing system for retailers adopting the certified system approach. Finally, the work group recommended that returns with balance due remittances be required no more frequently than monthly and then on the 20th of the month following activity. Any prepayments would be based on the retailer's history and electronic payments and information would follow standard formats.

The work group examining tax bases and exemptions researched the use of exemption certificates and recommended:

1) allowing purchasers to claim applicable exemptions at the point of sale by providing adequate identification and support;

2) adoption of electronic exemption forms based on a standardized format;

3) relaxation of good-faith requirements for sellers;

4) accepting blanket exemptions if sufficiently specific; and

5) requiring purchasers to supply the same information regardless of the mode of the sale.

The group, however, did not address the administration of exemptions for certain products and services, such as food, clothing, and medicine.

The fourth work group examined the treatment of bad debts, rounding, and sourcing. The group agreed upon a number of criteria for a uniform bad debt statute, including a definition, statute of limitations, tax due on the bad debt, refunds of bad debt credit, and provision of a deduction from gross sales in the period the debt is deducted. The group also recommended that states adopt a uniform rounding method (.5 increases to the next cent while.[4] decreases to the previous cent). Finally, the group examined sourcing principles. Assuming a sale of a product, the group recommended the seller source the sale according to one of five principles:

1) an "over-the-counter" rule, sourcing the sale to the business location where the sale occurs;

2) a "ship-to-consumer" rule based on the location of either the purchaser or the recipient of the sale;

3) an established address rule, whereby an address in the seller's books and records is used when neither of the foregoing rules applies;

4) a supplied or substitute address rule; or

5) a multiple points-of-use rule.

The September proposals, which address many components of the simplified system and constitute the preponderance of the issues the Project will likely address during Phase One, will be incorporated into model legislation that is likely to be introduced in state legislatures during the 2001 legislative sessions. The public, including major retailers and others, was afforded an opportunity to comment on the proposals at a public hearing in Chicago on September 29. A teleconference and a second public hearing are scheduled for October 13 and 26, respectively, in order to secure additional feedback on the September proposals as well as obtain comment on uniform definitions and other parts of the proposal that are anticipated for release in October.

Phase Two of the Project, which is expected to last throughout 2001, will address the development of additional uniform tax base definitions, the uniform tax return, and any recommended modifications to the model legislation arising from the conduct of the certified service provider pilot project. A complete summary of the proposals and information on public participation may be found on the web site

(1) In a separate development, contracts have been awarded for pilot projects that will be launched this fall in four states--Kansas, Michigan, North Carolina, and Wisconsin. The pilot will test a key element of the proposed simplified sales tax system: the use of a certified service provider to perform the sales tax administration functions on behalf of the retailer. The functions to be performed by the certified service provider in the pilot projects include the determination and calculation of tax due, tax collection, remittance, and filing of the returns. The pilot projects are expected to last one year and project administrators anticipate that retailers engaged in traditional and electronic commerce transactions will participate.

HARLEY T. DUNCAN is the Executive Director of the Federation of Tax Administrators, a non-profit association of state tax officials.
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Author:Duncan, Harley T.
Publication:Tax Executive
Date:Sep 1, 2000
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