McLure (2002a) argues that in response to the projected growth of e-commerce most of the states are participating in the Streamlining Sales Tax Project (SSTP). This project is intended to simplify and modernize sales and use tax collection and administration. State and local governments favor a legislative proposal that would in effect overrideQuillfor states that adopt the recommendations of the SSTP.
Several states are engaged in the SSTP to simplify their sales and use tax system in order to reduce the burden of collection for all sellers and create a collection system for remote sellers. One hope among SSTP proponents is that a simplified system will result in remote vendors voluntarily collecting the sales tax. Cornia et al. (2004) conducted a quan- titative analysis suggesting that voluntary compliance under certain condi- tions may occur with some frequency.
The SSTPs main goal is to provide a sales and use tax system that has the following characteristics: (1) neutrality — taxability should
E-commerce and the Future of the State Sales Tax System g 199
be independent of the method of commerce used in a transaction;
(2) efficiency — administrative costs should be minimized for both business and government; (3) certainty and simplicity — tax rules should be clear and simple; (4) effectiveness and fairness — taxation system should minimize the possibility of evasion; and (5) flexibility — taxation systems should keep pace with changes in the economy (Horn, 2003).
The SSTP envisages that each sales tax state would adopt the model ‘‘Uniform Sales and Use Tax Administration Act.’’ The Uniform Act would authorize the taxing authority of the state to enter into the Streamlined Sales and Use Tax Agreement with one or more states to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance for all sellers and for all types of commerce. The Agreement contains all the details of simpli- fication and uniformity and would constitute a ‘‘contract’’ between signatory states regarding what standards must be attained and how the states will act in unison with one another. By 2003, 20 states had adopted the Streamlined Sales Tax Agreement.
An important feature of simplification would be the establishment of standards for certified service providers and certified automated systems, and establishment of performance standards for multi-state sellers (McClure, 2002a). This would allow for an information technology solution for many of the problems of complexity in the sales tax system. There would be modern information technology used to further simplify compliance and a proposal that states provide monetary incentives intended to encourage adoption of such technology and voluntary registration of vendors who do not have a duty to collect use tax.
Certified automated system software is at the heart of the technology based solution to the sales and use tax problem. This system would calculate the tax imposed by each jurisdiction, determine the tax to remit to the appropriate state, and maintain a record of the transaction. It would incor- porate ‘‘look-up’’ tables mapping addresses to the taxing jurisdictions, indi- cating the tax treatment of each defined product in each state and the tax rate to be applied to taxable transactions in each jurisdiction.
In addition, it would calculate the amount of tax due, attribute it to the proper jurisdiction, and prepare the documents necessary for compliance (McClure, 2002a).
Another mechanism of the SSTP is the creation of Trusted Third Parties (TTP) to collect the use tax for vendors (Mikesell, 2000). Participating states and local governments would pay a TTP to handle compliance for all parti- cipating vendors. Participating vendors would then transmit necessary customer order information to the TTP. The TTP would do the appropriate sales or use tax calculations for that order. The TTP would arrange with the appropriate credit card company to add the appropriate tax to the bill.
The TTP would arrange that remittance went to the proper government or governments. The problem with this solution is that there is no inducement for participation even if the state paid for the TTP compliance costs. Mikesell (2000) asks, why would a remote vendor with no physical presence participate in the system?
There are some problems identified in the implementation of the SSTP.
Cornia et al. (2001) argue that a recent examination of in-state vendors’ costs associated with collecting and remitting the retail sales tax confirms that the costs to businesses are significant. A subsequent study reports that the compliance costs of sales tax collection for multistate firms are much higher than they are for firms operating in a single state.
In the current environment, adoption of a single rate would generally be difficult (Cornia et al., 2001). There are essentially three reasons for this conclusion. First, the loss of local fiscal autonomy would be a diffi- cult obstacle for many states. In states like New York, Colorado, Pennsylvania, California, and Alabama, local governments have significant control over setting the tax rate. In many states, property tax limitations have reduced or eliminated local fiscal control over the property tax rate. Therefore, in these states adoption of a uniform sales tax rate would require state government to play a much greater role in financing local governments. Second, it is likely that the only politically acceptable approach to instituting a uniform sales tax rate is for the rate to be revenue neutral. These constraints mean that a uniform rate is not feasible in most states. Programs that transfer sales tax revenue from current low-rate jurisdictions to current high-rate jurisdictions will be opposed by localities that are unwilling to share the windfall from higher rates with other jurisdictions in the state. Third, there are complexities to local sales taxes beyond those associated with rates. Many local sales taxes are earmarked for special districts that have no other source of tax revenue, or for special purposes or needs that are temporary.
There are three major challenges facing the simplification effort. First, states must find ways to simplify and harmonize the administration of 45 separate and distinct sales and use tax systems (Cornia et al., 2004).
Second, states will likely need to make concessions with respect to sales and use tax bases. The goal is for everyone to use similar definitions for goods and services, but not necessarily to have uniform tax bases.
Finally, states need to find a way to deal with the thousands of different state and local sales and use tax rates that a national business must understand in order to comply.
While there has been considerable success in getting states to agree on what a simplified system should be, there remain serious obstacles that must be overcome if the proposed changes are to be implemented by states (Cornia et al., 2004). Politics, revenue importance, and technology may
E-commerce and the Future of the State Sales Tax System g 201
undermine the simplification process. On the political front, state and local governments often openly compete with each other for new and old business by offering a variety of tax and fiscal incentives, such as general sales tax holidays and industry or firm specific sales tax exemptions. Second, many states and local governments would oppose policy changes that would force them to give up the autonomy. Third, some groups and individuals who have opposed the tax suggested that the compliance technology would be an invasion of privacy.
The benefits to the firm for collecting the tax are difficult to identify.
The remote vendor cannot point to better police or fire services provided by the revenues from the collected tax because remote vendors are unlikely to benefit directly from any expenditure. Also, vendors will not be able to identify lower overall tax rates as a result of collecting and remitting the use tax. In addition, it is uncommon for candidates who run for office to propose increased taxes. However, some larger firms would like a simplified tax system. For example, Wal-Mart, Inc. in 2002 had more than 3,300 retail facilities in the United States, including 3,172 outlets in locations that impose a sales tax. With the differences in tax base definitions and potentially 377 different sales tax rates, it seems clear that the cost of compliance is substantial for firms such as Wal-Mart (Cornia et al., 2004).
In principle, the United States Congress, acting under the power granted by the Constitution to regulate interstate commerce, could enact legislation to override the Quill decision, substituting a less demanding test for the physical presence test of nexus. This would be difficult because of the political power of the direct marketing industry (McLure, 2000). Essentially, there is no political constituency for such a reform, but substantial opposition to it (McLure, 2002a).
States that attempt to force remote vendors to collect use taxes have not enacted realistic rules that would exempt small remote vendors in the state from collecting the duty. In addition, vendor discounts fall short of costs of compliance for small firms and would be especially inadequate for remote vendors, who would encounter particularly high costs of compli- ance. The burden of compliance would be much worse for small firms engaged in electronic commerce. Large firms might be able to deal with the multitude of state and local use taxes, small firms would need substantial simplification and could find interstate sales uneconomical if the duty to collect use tax were expanded.
There are also the political concerns when attempting to implement the SSTP. Mikesell (2001) argues that if successful the SSTP would break two centuries of the American federalist tradition and negotiate a simplified unified sales tax structure for use by all states. Although Congress might seek to simplify compliance by specifying a single uniform sales tax
structure for all states to use, this approach would violate the American approach to federalism in which states have responsibility for their own revenue systems. Of much greater practical significance, however, is the reality that Congress has absolutely no experience with the design and implementation of general consumption taxation (Mikesell, 2001). Indeed, the US is one of the few countries without a national sales tax.
The following section provides conclusions and recommendations on possibilities for reform to the existing state sales tax system.