Streamlined sales tax up and running - and affecting many businesses.
Which States Are Involved?
Perhaps one of the most common misperceptions of the sales tax streamlining effort is that it is limited to a small number of states. In fact, every state that imposes a sales tax, except for Colorado, is a participant in the SSTP. Now that the governing board has been constituted, these states will continue to have substantial input into the development of model SST tax laws, regulations and policies, through a state and local advisory council. Further, SST compliance--or adoption of its model laws and policies--has spread to 18 states as of the Oct. 1, 2005 launch date for the governing board. The governing board's 13 "full member" states are Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota and West Virginia. The five current "associate member" states are Arkansas, Ohio, Tennessee, Utah and Wyoming; Nevada become an associate member as of 2006.
Broad Amnesty Has Peaked Interest
As noted above, the streamlining process has been ongoing, with enough complexity and obscurity to confuse--and perhaps tire--all but the largest businesses and firms that regularly attend meetings and participate in conference calls and the like. However, a major amnesty program--unprecedented in the history of sales and use taxes--has increased the project's profile dramatically, causing a broad array of businesses to consider the SST system for the first time.
To qualify for amnesty, a seller must register through the SST registration system, available at www.sstregister.org/ sellers. In return for registration in all full-member states within the first year--between Oct. 1, 2005 and Sept. 30, 2006--sellers will be completely forgiven on uncollected or unpaid sales or use taxes for all periods before the registration, from each of the states. Further, sellers can register in any associate member state, although registration in such states is expected within one year of the date that the associate member state obtains flail membership.
Caveats: Amnesty has some important limits. It only applies to sales or use taxes due from the seller in its capacity as a seller, not to such taxes due from the seller in its capacity as a buyer (e.g., use tax on promotional items). In addition, taxes other than sales and use taxes are not covered by the amnesty; thus, voluntary disclosure agreements with the member states, as well as nonmember states where there may be a liability, should be considered. Anmesty also does not apply to matters for which the seller has received an audit commencement notice, making registration timeliness an issue.
Other considerations include a requirement to remain registered for at least 36 months. This applies regardless of nexus in the member states, and, with new states entering the governing board, maintenance of a "streamlined" registration and compliance could be a major change for businesses now remitting in only one or a few states.
Compliance Methods for Registrants
To address this issue, one of the bedrocks of the streamlined effort has been the promise of free compliance systems for voluntary registrants. Under the SST registration system now being offered by the states, registrants have the choice of using their own method of compliance or using (1) a third party (a certified service provider (CSP)) or (2) certified compliance software (a certified automated system (CAS)). In either case, registrants are relieved of liability for relying on these certified methods.
As of the Oct. 1, 2005 launch date for streamlined registration, however, neither the CSP nor CAS method was available, leaving some potential registrants wondering what to do. While the governing board appeared to signal an option for these sellers to register and delay compliance until the CSP and CAS methods became available, other sellers not planning to use certified systems likely will have to begin compliance immediately on registration or face liability for the interim period between registration and tax collection.
Is It Voluntary?
So far, some of the benefits of the SST have been discussed--namely, amnesty and certified compliance methods. The SST system also has many other state requirements that benefit all sellers, such as (1) ensuring a uniform tax base between the state and local jurisdictions, (2) providing taxability matrices and (3) providing rate and boundary databases that may be used to assign the proper rate to a transaction and give adequate notice for rate and boundary changes.
However, the seller (and purchaser) has requirements as well, regardless of whether it chooses to voluntarily register through the SST system. In every member state in which a business is engaged in activities that rise to the level of requiring sales tax compliance, the business must understand and comply with substantive law changes in effect currently. In many cases, these changes were enacted prior to the governing board's Oct. 1, 2005 launch date, with varying effective dates by state. Further, the model law that each member state must follow--the Streamlined Sales and Use Tax Agreement--allows states until Jan. 1, 2008 to comply with some of the key provisions. Thus, understanding the streamlined changes and tracking their adoption by the states is necessary, not only to take advantage of certain administrative benefits of the SST system, but also to avoid liability exposure.
Streamlined Definitions Have a Broad Effect
The agreement contains sets of "product definitions" and "administrative definitions" that must be used by member states. The product definitions affect specific categories:
* "Computer-related" items;
* Food and food products;
* Healthcare-related items; and
* Telecommunications and related services.
Definitions for telecommunications and related services are not required to be adopted by member states until 2008, although some states have already begun adopting them.
These changes, such as the computer software definitions, must be understood at both the agreement level and at the level of each member state in which the taxpayer will collect or pay tax. This could prove difficult, as states are not restricted in how they may enact "entity-" and "use-based" exemptions for products that would otherwise fall within these categories. Further, until the governing board provides regulations or other guidance on the placement of products within them, states may have separate exemptions that potentially overlap the agreement's product categories or may dispute businesses' interpretations of which products fall within these categories. For example, states and businesses could disagree on whether certain medical products should be classified (1) under a state's current exemption, such as a "medical device"; (2) under the agreement's definition of "durable medical equipment"; or (3) perhaps under another agreement definition, such as "prosthetics."
Of broader consequence to businesses are the agreement's "administrative definitions." The definition of "sales price" must be adopted by all member states; all businesses that currently file or will file in a member state must carefully examine which components of the model "sales price" definition the state has adopted. For example, states can exclude "delivery charges" (which is also defined in the agreement) and installation charges, as well as a nebulous category of "charges by the seller for any services necessary to complete the sale." A state's failure to exclude one of these items from the sales price definition means that it is included. Provisions on the inclusion of third-party payments in sales price are also part of the agreement, although states are not required to adopt these provisions until January 2008.
Another related provision not required to be adopted until 2008 is a definition of a "bundled transaction." This definition includes a decision tree in which a transaction is analyzed as to whether it will fit in the bundled transaction category. Examples include a form of the true object test and a de minimis standard based on a percentage of the sales or purchase price. However, regardless of whether a transaction is classified as a bundled transaction under the agreement's definition, states are free (with limited exceptions) to treat these bundled (and nonbundled) transactions in any way they wish. Thus, any business selling (or purchasing) products and/or services with taxable and exempt components will need to understand not only the application of the agreement's bundled transaction definition and the status of its adoption by a member state, but also how that member state is using the definition for purposes of its imposition statute.
Sourcing Rules Pose Challenges
The agreement contains a hierarchy of rules for sourcing sales to member states on a destination basis. These rules must be followed by all sellers. However, no agreement provisions address potential conflicts between these rules and nonmember states' sourcing rules. Further, purchasers are not relieved of liability for the seller's adherence to these rules. For example, a software seller could use the purchaser's billing address under the sourcing hierarchy and charge tax accordingly, but the purchaser still could have a use tax liability based on the location in which it first uses the software purchased.
Another complicating factor is a variation on the sourcing rules for "multiple points of use" purchases, in which the seller is relieved of liability, but the purchaser is obligated to "apportion" the purchase price among the jurisdictions in which the item is concurrently "available" for use. Certain amendments that apply the multiple-points-of-use treatment to tangible software (in addition to electronically delivered software services and "digital goods") are not required to be adopted until 2008. Further, amendments that provide guidance to sellers when a purchaser does not claim the multiple-points-of-use sourcing treatment are not yet in effect in most member states. Compliance, both for sellers and purchasers, in the face of these complex and changing rules will be a challenge for even the most sophisticated tax department.
Exemption Administration--A Major Improvement for Sellers
One of the agreement's major benefits, applicable to all sellers, is the waiver of the "good faith" requirement for taking a properly completed exemption certificate. Thus, businesses making exempt sales into a member state will be relieved of the responsibility to verify the purchaser's qualifications for the claimed exemption (with certain exceptions, such as when multiple-points-of-use treatment is claimed for a nonqualifying item). Further, states must allow sellers to either (1) accept a paper certificate (standard across the member states) or (2) retain the exemption data electronically in lieu of a signed paper certificate. Additional seller-friendly provisions are not mandatory for states to adopt until 2008--such as allowing the seller to take the exemption certificate, without being subject to the good faith standard, within 90 days of the date of sale, and to prove the exemption or accept an exemption certificate in good faith within 120 days of a state's request.
Some Practical Notes for Small Business
The launch of the governing board does not mean that businesses now have to collect and remit sales tax in every state, nor does it mean that they have to collect and remit sales tax in any of the member states solely because of the October 1 effective date. Traditional nexus rules continue to apply. Currently, the program is voluntary, requesting only that businesses participate and register with the SST system.
However, as noted above, some key changes to state tax law and administration could affect any business, regardless of size. For example, if a business located in a nonmember state sells into a member state, the seller may find it beneficial to collect and remit tax on such sales and register with the SST system. The reasons may vary; for instance, the buyer may desire tax collection by the seller, as the former is still liable for the use tax on its purchases. Further, it could be in the seller's best interest to register, as it could gain valuable protections from that state for doing so. For example, a seller could choose either the CSP or CAS option to assist in filing and remitting tax, thereby reducing its audit exposure in the state, at no cost (implementation issues aside). The benefits of audit protection, the amnesty program, third-party assistance at no cost and the use of one form for exemptions could outweigh the drawbacks of all of the issues associated with the SST system.
Each taxpayer should be concerned with the effect of these changes on its own business and look at where sales tax returns are being filed currently. If the business is a seller in a member state and is currently collecting and remitting sales tax there, it should review the new laws and procedures imposed by the state under the agreement, to determine how this changes its compliance process. The seller will need to answer many questions. Has the due date changed? Has a definition of "sales price" of a taxable item changed? Will the new "bundle transaction" definition affect the business's transactions?
Plus, sellers should look to where they are not filing to determine whether they have nexus in a member state and to evaluate how the amnesty program might help them. Regardless, sellers still must follow the current nexus rules and comply with existing filing requirements.
Opportunities and Pitfalls
The SST effort has probably gone further than most expected, with broad state adoption (or at least participation) and a registration system and governing body up and running. Still, the prospects for achieving the states' ultimate goal remains uncertain--convincing Congress that the simplification achieved thus far is sufficient to warrant granting states the authority to require out-of-state sellers to begin to collect and remit sales tax. Perhaps this has led to the mistaken belief in some parts of the business community that the SST system does not affect them. However, as demonstrated in this brief overview of the breadth and complexity of the law and administrative changes already in effect, sellers and purchasers that fail to account for these changes are likely to miss out on the opportunities--and pitfalls--that accompany this major push to transform sales and use taxes.
Editor's note: Mr. Salmon is the chair of the AICPA Tax Division's State & Local Taxation Technical Resource Panel (TRP). Mr. Fishman is a member of that TRP. For more information about Ibis column, contact Mr. Hogroian at firstname.lastname@example.org or Mr. Fishman at mfishman@ caindavid.com.
Scott Salmon, CPA, M.Acc.
Ferdinand Hogroian, J.D.
Mark D. Fishman, CPA
Cain & David, EC.
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|Author:||Fishman, Mark D.|
|Publication:||The Tax Adviser|
|Date:||Dec 1, 2005|
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