Internet Sellers: Is the Streamlined Sales Tax Coming for You?
I’ve been using the Internet now for almost 15 years, and buying things on eBay for most of that time. And for all of that time I’ve loved every sales-tax free minute of Internet-based shopping. But as the Streamlined Sales Tax Act continues to pick up steam, I’m beginning to believe that we will see those days eventually come to an end.
The Streamlined Sales Tax (SST) Act is a piece of legislation that will completely transform how we currently apply sales tax on the Internet. What we have now is an origin-based system. If I’m a web retailer in California and I sell to someone with a California address, I charge sales tax. My origin and my destination are the same place, so sales tax applies, even though I’m an Internet retailer. If my customer lives outside of California, on the other hand I don’t. That’s because while my origin is in California, the sales destination isn’t. But the SST changes that, by moving the emphasis to a destination-based tax system, and creating a uniform reporting and collection system. That doesn’t mean the sales tax rate will become the same in all states - only that the method of reporting and collection will become the same.
For the SST to become a reality, two-thirds of all the states must sign on as full members, and Congress must approve the system. If that happens, all Internet retailers will be required to collect, report and remit sales tax on all of their sales to buyers who live in member states.
Right now there are 15 full member voting states, who have met all of the preconditions to join and 7 associate member non-voting states, who are still working things through. Only full members may vote on amendments to or interpretations of the Agreement.
So who’s in? The current full member-states are Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, and West Virginia. Four of the associate member states become full members in 2008 (Arkansas, Nevada, Washington, and Wyoming), and Tennessee joins in 2009.
It’s been slow going because many states need to make constitutional amendments to change their sales-tax systems, which takes time. There’s been plenty of opposition from various retailers, including eBay who has been lobbying intensively against the SST. And, for some states, the change to destination-based taxation has been a real problem - so much of a problem that two associate member states threatened to quit the agreement, while plenty of other states have refused to join.
Faced with this opposition, the SST Board has made a major about-face on the issue of sourcing, and has voted to allow member states to keep their origin-based sales tax in place under the SST, if they also meet certain other requirements. By changing the SST Agreement states will be offered one of two options: destination sourcing for all sales, or destination sourcing for interstate sales (buyer and seller in different states) and a single method of origin sourcing for intrastate sales (buyer and seller in the same state).
This allows Ohio and Utah, the other two associate members, to stay in the Agreement, and appeases a whole coalition of states, including Arizona, California, Florida, Illinois, Missouri, New Mexico, Pennsylvania, Texas, and Virginia who weren’t interested in joining without the change.
I read a report recently that estimated 2007 Internet sales at about $250 billion worldwide. The United States accounts for a large percentage of that amount. To me, that’s just too much money for any government to resist. It may take several more years to get all the bugs worked out, but I believe the SST is here to stay.
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Megan has been watching the sales tax legislation, both at the state level and through the national organization, for awhile now.
Thank you, Megan, for keeping us informed. This can DEFINITELY impact how business is done on the Internet.
I agree with Megan’s comments.
The internet sales tax is really a variation on a theme of the mail order & catalog companies of old. Instead of the catalog company collecting sales tax, the customers were supposed to pay the sales tax on items purchased through mail order when they filed their returns. The main problem is that most people don’t pay it. A lot of people don’t even know they are supposed to pay sales tax in their state and look at internet/catalog ordering as trade offs between shipping and sales tax.
When the sales amount and resulting taxes are small, it isn’t worth the government’s time to go after it. Now that that the internet/catalog has significantly grown, it’s big enough to get the government’s attention and move the tax collection to the point of sale.
I think what gives me the biggest pause for thought is the massive changes that will have to be made to shopping cart software, and what that’s going to cost Internet retailers to implement. Even though the SST Agreement is supposed to provide some type of reimbursement to make the change cost-neutral for E-tailers, I have a hard time believing that will happen.
On the other hand, brick-and-mortars have complained for years that E-tailers have an unfair advantage when it comes to the responsibility to collect and remit sales tax. To them, this could be looked as as a case of the pendulum swinging the other way.
But then I wonder what SST would do to the economy of states like Oregon, which has no sales tax, and has enjoyed the benefits of cross-border shoppers from Washington, California and Nevada. Heck, I had girlfriends in Vancouver, Canada who would come down to Portland once or twice a year for long weekends just to shop.
It will certainly be intereresting to watch, although I still think implementation is a fair ways off. Convincing 33 states to join and then Congress to act is not a job for the faint-hearted, especially when members’ phones begin to ring with angry (voting) E-tailers. And there is something to be said for the impact Internet commerce has had on Post Office revenues. Correspondence may be losing out to email, but packages roll right along, and package mailing costs have increased at a FAR higher pace than first class letters.
I am slightly confused how states can do this. Section 9 of Article 1 of the constitution states “No Tax or Duty shall be laid on Articles exported from any State.” Wouldn’t this be a violation. I am no legal expert, is there precedent?
I am DEFINITELY NOT a Constitional scholar. So, first, that disclaimer….
I believe that what is being proposed is either a Constitutional amendment or something like that. There are currently 27 amendments to the Constitution right now - the last was done in 1992. (I searched Wikipedia for that data.)
My reasoning behind that is because of the number of states needed to ratify this change - similar to other Constitutional amendments that have been tried and failed.
There will be a big push here, though, to get this one approved simply because the states need revenue and the Internet is considered an unfair advantage by bricks and mortar stores.
Megan, thanks for staying on top of this. I had done some research regarding the SST and internet sales for a client a couple months ago. As you pointed out, first the program needs to be adopted by the states and then passed through Congress.
I think one thing that will continue to cloud the water is the different treatment of tangible vs. intangible property. Some states already tax virtual product (downloads), many do not. And then we have the states that have an excise or gross receipts tax rather than a true sales or use tax system.
I agree with you Megan - the SST will come about, and faster than true AMT reform, but I think we still have a couple of years before it gets all the way through. The wheels might start turning faster after next year’s presidential election.