| NGA Proposal:
Streamlined Sales Tax System for the 21st
Century by Staff on 11/19/99 of National Governor's Association Topic: Proposal | |
| I This document also available at the NGA website at: http://www.nga.org/Internet/Proposal.asp The current system of state and local sales tax administration is complex and burdensome. Differences in tax law among the states, coupled with the extensive use of the tax by local governments in many states, impose a significant compliance burden on multistate sellers, a burden for which they are not compensated in many instances. The tax system has not kept pace with changes in the U.S. and global economy and is particularly out of step with electronic commerce. Moreover, current legal rules are such that some types of retailers are treated differentially for the same items depending on the form of selling in which they engage and their contacts with the different states. Substantial changes are necessary if the sales tax is to continue as an integral part of the state and local revenue system. Sales tax laws must be made significantly more uniform across the states, and the administration of the tax must be substantially overhauled and simplified. The goal of this proposal is to develop a more simple, uniform, and fair system of state sales and use taxation that significantly reduces the burden imposed on retailers, preserves state and local sovereignty, and enhances the ability of U.S. firms to compete in the global and information economy. The proposal is voluntary, retaining current law with regard to nexus, and moves to a uniform system over the longer-term. The proposal has both short-term and long-term components. Step 1 - Create a zero burden system over the next 2-5 years. The short-term goal is to create a burdenless system of collecting sales and use taxes that are owed by purchasers. The system will be simple, streamlined, and voluntary to both sellers and to states. The proposal's key tenet is to achieve significant simplification of sales tax systems to match the rapid evolution of the information economy and global trade. The system will incorporate advanced information processing technologies and strategic simplifications of the sales tax system. State and local governments will also be responsible for paying all costs associated with the system so that costs and burdens will not be imposed on participating sellers. The Streamlined Sales Tax System for the 21st Century will be designed to achieve these goals for participating sellers. The key characteristics of this system will:
2. Maintain the current definitions of nexus for all state and local governments (i.e., there is no intent to expand or contract the definition of nexus). 3. Simplify the current system of exemption administration through a combination of changes in state laws, standardized administrative procedures, and technology. 4. Enact this system by the states and not request any action by the federal government to compel sellers to collect. 5. Offer this system in a phased-in approach to all sellers on a voluntary basis. 6. Eliminate costs of compliance, tax returns and payments, and tax audits. 7. Eliminate tax rate monitoring and implementation, and eliminate record-keeping requirements for sellers. 8. Eliminate any requirement for sellers to police the intent or status of purchasers asserting special exemptions. 9. Eliminate risks (bad debts, audit liabilities, etc.) for seller exercising reasonable care (no negligence or fraud). These goals are the design requirements for the Streamlined Sales Tax System for the 21st Century. The states will implement uniform laws, administrative practices, third-party technology, and collection systems as necessary to achieve these results. The system will be developed within 18 months and the precise combination of uniform laws and technology may be adjusted in that time period to achieve these goals. States and local governments will work cooperatively with the business community to design the system. Software that facilitates collection of state and local sales taxes comprises an essential element of this proposal, although it does not constitute a panacea. States must undertake substantial simplification and reforms of their existing tax systems to implement a viable software-based solution that dramatically reduces the tax collection burden not only for remote sellers but for all merchants, regardless of whether they sell goods in brick-and-mortar stores, through mail-order catalogs, or through the Internet. The goal is for states to develop and implement a uniform approach to the collection and imposition of sales and use taxes on remote sales. Step 2 - Adopt a completely unified system over the 6-8 year time period. While the first step will simplify and streamline the current system, the second step, or ultimate goal, is for all state and local governments to adopt the same classification systems, definitions, and audits. Ultimately the voluntary system will be extended to all states and localities as well as for all remote sellers, ending the inequity of the current system. In order to collect sales and use taxes, states will have to conform to the uniform, nationwide system. States that do not adopt this approach and mechanism by a fixed date will be denied the ability to collect taxes on remote sales until they adopt the uniform system. This system could eventually be extended to all merchants and all types of transactions, regardless of whether they occur in a store, through a catalog, or via the Internet. All merchants should reap the benefits of a uniform, simple, and fair system that eliminates the burdens that have historically been associated with tax collection responsibilities. Necessary State Simplifications: The Short-Run Goal – Creating a Streamlined Sales Tax System General Approach The general approach of the streamlined sales tax system is to reduce the costs and burden of sales tax compliance for participating sellers to as close as possible to zero through a combination of: Shifting sales tax administration to a technology-oriented business model in which primary responsibility for calculating, collecting, reporting, and paying the tax is lodged with "Trusted Third Parties" (TTPs) instead of the seller. Simplifying sales and use tax laws and administrative practices in key areas necessary to enable the technology and new business model to operate properly. States assuming responsibility for the costs of the system by reimbursing TTPs for their costs and for the costs of integrating their systems with those of participating sellers sufficiently to allow the seller to participate in the system. A participating seller will not be charged for participation in the streamlined system. Plan Details Participation in the System Participation in the system will be voluntary to sellers and to participating states. There will be no change in current legal standards regarding the imposition of a use tax collection obligation on interstate sellers. Participating vendors would be free to engage in such business activities in those states as they desire without incurring additional sales and use tax obligations. The key characteristic is that the remote or interstate seller must be technologically capable of participating in the system by being able to transmit and receive information regarding transactions to a "Trusted Third Party." As the system succeeds and is refined, states will be in a position to expand its use, on a phased basis, to all retail stores. Trusted Third Party A central element in the proposed, new system is the "Trusted Third Party." [See attached chart.] Participating states and local governments will enter into contracts with one or more TTPs to operate the tax administration system. The TTP will be responsible for receiving required information on transactions from a seller and providing software for determining the taxability of a transaction, the appropriate state and local tax rate, and the tax due. The TTP will also provide tax information to sellers at the time of the sale, so that information on tax due is available to a customer before completion of the transaction. TTPs will also enter into arrangements with credit card and other electronic payment processors so that tax(es) owed the state or local government may be remitted directly to the TTP for transmittal to the state. The TTP will also be responsible for providing all transaction and return information to the states (and local governments where appropriate) along with the tax remittance. A competitive bid and negotiation process will be used to select the TTPs. It is expected that multiple TTPs will be selected. The selection process will include a certification of the software used by the TTP to make taxability determinations and to apply the appropriate state and local tax rate. Transactions sent through the system will be presumed to have had the correct tax calculated and paid by the purchaser. Costs of the System Trusted Third Parties will be paid by states and localities on a "per transaction" basis (either a flat per transaction rate, percentage rate, or combination) based on negotiated rates. The fee paid to TTPs will be used to pay all costs associated with the system, including the costs of integrating seller systems with those of the TTP, the costs of payment processors, and the costs of the TTP itself. All participating TTPs will be paid the same rate. Burdens and Incentives for Sellers The only obligation imposed on a participating seller will be to integrate its business system with that of the TTP so that information required for tax determinations can be made available to and received from the TTP at the time of the transaction. Costs of this integration will be reimbursed by the TTP through the transaction fee paid by the states. The seller will not be responsible for making taxability determinations or handling state tax money. Consequently, the seller will not be subject to tax audits by the states. The vendor will be subject only to a periodic "system check," sufficient to ensure that the appropriate information is passed to and received from the TTP. A single, centralized check will be performed on behalf of all states. It is expected that TTPs will provide financial incentives for sellers to enter the system and to sign up with a particular TTP. The fee to the TTP will be structured by participating states to provide a bonus incentive in the early months of participation. As an additional incentive, the proposal would not subject remote sellers to examination or review for any tax liabilities they may have incurred by inadvertent nexus-creating contacts prior to entering the system, provided they have not been contacted by a state for such purposes. Participation in the system will not, however, be considered a factor in determining potential liability for any other tax imposed by a participating state. Privacy Issues The proposal will be constructed to ensure privacy. A TTP will not be in possession of personal identifying information for an individual buyer paying taxes at the time of sale. Individual names, street addresses, and buyer credit card information will not be transmitted to the TTP. While the tax rate assignment will be made based on an individual street address, the address will be converted to a "geo-code" (i.e., taxing district identifier) by the seller before information is transmitted to the TTP. Administrative Simplifications The proposed tax-collection system would eliminate costs and inconveniences to the merchant. From the merchants' and their customers' perspectives, the tax collection system is intended to operate seamlessly with the credit card processing system, so they effectively do not even know it is there. The biggest benefit, however, is that migration to this tax collection system would end discrimination based on the way an item is purchased. Under this system, goods are treated equally from a tax perspective regardless of whether they are bought in a store, from a catalog, or via the Internet, and the tax system will no longer build in a competitive advantage or disadvantage to one class of merchants at the expense of their competitors. The system will be accompanied by certain strategic simplifications. These include: Uniform product codes; Uniform sourcing rules; Uniform procedures for the administration of exempt transactions (to include changes in the "good faith" standard for acceptance of exemption certificates); Initiating the development of uniform definitions for use in state tax laws; Limits on the frequency with which local government tax rate changes (including from annexations) may be made; and Required advance notice of such changes. The Long-Run Goal – Adopt a Completely Unified System While simplifying and streamlining the existing state sales tax systems will reduce the burden on the private sector to collect taxes, additional efficiencies can only be attained by creating a uniform system. The goal will be achieving one classification system for products, one set of definitions on exemptions, and a one-stop audit process for all state and local governments. Financial incentives and penalties would be adopted to ensure that all states participate in the uniform system. Such a system would also include uniform sourcing rules and limitations on the extent and frequency of state and local tax law changes. Specifically, states would not be able to unilaterally make changes in the product classification, exemption definitions, or sourcing rules. Instead a system would be in place where changes would be determined by a "consensus board" made up of representatives of participating states. States would be obligated to follow the consensus rules. These consensus changes could only be made once a year. States that fail to adopt the changes would not be allowed to utilize the uniform system. Eventually all states would enact conforming legislation so that the "consensus board" changes would be automatically adopted by the states. Although state and local governments would be allowed to change tax rates on specific goods and also change exemptions, they could only make changes within the uniform system. In addition, states would only be allowed one "change window" per year. This uniform system would utilize the "Trusted Third Party" mechanism to collect and remit tax revenues, and would maintain the existing nexus rules. Specifically, no federal legislation to compel interstate sellers to collect taxes would be required. Implementation The streamlined system will be implemented through a combination of uniform legislation and multistate agreements among participating states. The uniform legislation will cover a variety of items, including authority to participate in and help finance the system, as well as the required administrative simplifications regarding exemptions, rate changes, etc. The multistate agreement will provide the details for developing, operating, and governing the system. It is anticipated that the system can be implemented in the initial states by July 2001. |
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