SSUTA: Much ado about little?

Sep 01, 2005 9:30 PM  By

The Streamlined Sales and Use Tax Agreement (SSUTA) goes into effect Oct 1. What does that mean to you? For now, probably not much.

On July 1, tax officials, state lawmakers, and industry representatives met in Chicago to establish an 18-state network for the purposes of collecting taxes on Internet sales from out-of-state merchants. The agreement that they approved doesn’t require the companies to actually collect the taxes, however. Only Congress can mandate that. Rather, the agreement creates a uniform tax structure among those states that have different tax rates on different items. For example, currently New York has a 4.25% sales tax on apparel, while California taxes apparel at 7.25%. If both New York and California joined SSUTA, the same tax rate would apply to apparel items bought from companies in both states.

As of mid-August, that uniform rate has not yet been determined. Additional states can still join the ranks so long as they’re willing to adopt the uniform tax legislation established by SSUTA.

To encourage merchants to voluntarily comply with the agreement’s Streamlined Sales Tax Project, the project committee created incentives. For instance, various software vendors will offer free tax collection and other services to online merchants who voluntarily agree to collect taxes on all online sales in participating states. In addition, there will be a one-year amnesty for companies that owe taxes on previous online sales that were made in any of the participating states.

David Bertoni, a partner in Portland, ME-based law firm Brann & Isaacson, says that such amnesty protects companies that have previously been audited — in particular major multichannel merchants such as Blockbuster, Office Depot, and Wal-Mart that have been involved in legal disputes regarding taxes on Internet sales.

A little history

States, municipalities, and other local governments have been eager to collect use taxes on goods sold to their residents from remote sellers since the courts determined that you couldn’t force a company without physical presence in a given state to act as an unofficial tax collector. In 1992 the Supreme Court confirmed those decisions with Quill v. North Dakota, in which it ruled that a state could require only sellers that have a physical presence in that state to collect state taxes from customers. Since a remote seller ostensibly doesn’t use the state’s services — it doesn’t have employees in that state to contribute to wear and tear on the roads, for instance — the company should not be subject to the state’s use taxes.

In the ruling, the Supreme Court did say that the buyers were responsible for paying the applicable local taxes, but that the U.S. system of more than 7,500 taxing jurisdictions was too complex for remote sellers to manage. Quill also included a provision allowing Congress to pass federal use-tax laws, even if those laws would in effect overturn Quill.

Those supporting the Streamlined Sales Tax Project believe that a legitimate voluntary tax program will convince Congress that Quill should be overturned. The contention of the 18 states choosing to participate is that a new uniform law would generate billions of dollars in tax revenue that currently goes uncollected. It is estimated that online spending for last year exceeded $66 billion. Based on that figure, it is also estimated that state and local governments lost more than $15 billion on untaxed Internet sales.

While attorney Bertoni says that the SSUTA may make compliance easier, clearly not all of the states agree. (See “Why they oppose the tax,” upper right.)

Those in favor of the legislation typically fall into two camps, Bertoni says: those who see the tax laws leading to more revenue, and those who believe in the sanctity of the existing state and local tax laws. “Most of those in favor only see the revenue from sales and the tax dollars that go with those sales,” says Bertoni. “They don’t see the potential side impacts.”

Taxing concerns

One such side effect could be a loss of sales for online merchants and other remote sellers. “As most in the industry well know, the number-one deterrent for direct mail buyers is the high cost of shipping,” says Lois Boyle, president of Mission, KS-based direct marketing consultancy J. Schmid & Associates. Often times, buyers rationalize away the shipping expense because they don’t have to pay sales tax.

“If a uniform tax were implemented, it would certainly have an impact on that line of thinking,” Boyle says. “When you load up the cost of shipping and the additional taxes, it’s almost not worth purchasing anything under $100. The percentage of ‘add on’ fees is what scares me…especially for Internet marketers that have low average order sales.”

Sarah Hewitt, a corporate partner at New York-based law firm Brown Raysman Millstein Felder & Steiner, believes that if Congress does get involved with the streamlining process, it will be sensitive to small and midsize remote sellers. Then again, given the other, more pressing issues that Congress is dealing with, and given the less-than-unanimous state support for the SSUTA, few believe that Congress will be introducing use-tax legislation in the near future.

Sales tax for each state in the Streamline Uniform Tax Program
Arkansas 6%
Indiana 6%
Iowa 5%
Kansas 5.3%
Kentucky 6%
Michigan 6%
Minnesota 6.5%
Nebraska 5.5%
New Jersey 6%
North Carolina 4.5%
North Dakota 5%
Ohio 6%
Oklahoma 4.5%
South Dakota 4%
Tennessee 7%
Utah 4.75%
West Virginia 6%
Wyoming 4%

Why they oppose the tax

It’s no surprise that 18 states want to band together to levy taxes on remote purchases, since there is substantial tax revenue at stake. But why don’t all states want to see such taxes? “Retail” states such as New York and California oppose the SSUTA because they prefer to protect the interests of all local businesses — including those that sell to out-of-state customers. When you think retail, consider all the online startups in California and how such tax laws would affect small businesses. These states believe that such laws would impede the growth of new and small businesses, if not put many of them out of business. In addition, a law requiring businesses to collect taxes in all states would probably necessitate hiring additional accounting personnel or outsourcing such work to a third party.
JF