Practical Ecommerce

Streamlined Sales-Tax Director on Efforts to Simplify

Attempts to simplify the administration and collection of Internet sales taxes in the United States may be the most daunting task in the ecommerce industry. There are thousands of state, county and municipal taxation districts and each has its own tax rates and rules. One organization that is working to make it easier for ecommerce merchants is the Streamlined Sales Tax Governing Board. We spoke with its executive director, Scott Peterson, about that organization’s progress.

Practical eCommerce: Several states, most recently New York and Illinois, have been moving towards collecting Internet sales taxes linked to affiliates of merchants in those states. This is the so-called “Amazon tax.” What does the Streamlined Sales Tax Board think of that action?

Scott Peterson

Scott Peterson

Scott Peterson: “SST really doesn’t have an opinion per se on that particular issue because at least two of our member states — Rhode Island and North Carolina — have adopted that. And, while we would prefer that the other states make their sales tax better, the fact that two of our member states decided that this is something they needed to do in addition to making the sales tax better, the governing board decided that it’s a state by state issue and we’re not going to have an opinion on that.”

PEC: If states are developing their own methodologies for computing sales tax, doesn’t that run counter to your mission of streamlining and simplifying?

Peterson: “If all the state does is adopt that affiliate nexus legislation, it does run counter to one of our two primary goals, to make the sales tax simpler and more uniform for people who are collecting the sales tax.

“However, by adopting that affiliate nexus-style legislation, those states do think they are trying to get at our second goal of collecting sales taxes. But I would agree that doing that in and of itself does not make your sales tax any better. It perhaps gets some of the sales tax collected, but it doesn’t make your sales tax better for retailers.”

PEC: Would states raise more money by collecting their own taxes than they would by simply following the recommendations of your organization?

Peterson: “That’s one of the issues we struggled with in our organization. Making your sales tax better doesn’t in and of itself produce any revenue. It’s the kind of thing that you have to do because it’s a good public policy decision to make. [For example,] New York is collecting additional revenue from their Amazon-style nexus legislation — from what I can tell, they’re the only state that is — and that’s because some of the really large online-only retailers didn’t end their affiliate relationships there. But in any other state where this legislation has been adopted, merchants ended their affiliate relationships. When you end the affiliate relationship, you end the applicability of the tax — no affiliate, you’re not subject to the tax.

“Streamlined member states do collect revenue as members of Streamlined, but it’s really a lot more to do with some of the non-streamlined things that we’ve all agreed to do together instead of simply making your tax better. Retailers don’t collect taxes unless they have a valid business reason to do it, and the valid business reason is either the law tells them they have to or their customers insist that they do it.”

PEC: Is the collection of Internet sales taxes becoming more streamlined?

Peterson: “It is. Some of that is what we have been doing. We’ve identified the issues that created complexity by asking retailers. They’ve told us make the tax less complicated. We believe that changes we’ve convinced states to make have made the tax easier for retailers to collect.

“But the overwhelming reason why sales tax administration is becoming easier is because of the huge increase in technology. Technology can solve most of the problems. It doesn’t solve all of the problems. We’re trying to identify those areas where it can’t.”

PEC: Give us an example of a tax problem technology can’t solve.

Peterson: “One thing that technology doesn’t solve very well is definitions, where you have five states all exempting the same thing and having different definitions of that thing. The definitions can be just enough different that retailers have to have an almost entirely different set of tax rules for each of the states, even though they’re all trying to exempt exactly the same thing. It’s not the kind of thing that technology makes very simple.

“Another example is to have definitions that are so narrow that every time you, as a retailer, bring some new product out that looks like it might be inside that definition, you have to reach out and ask that state. So, one of the things that we got the states to agree to was broad definitions so that the retailer doesn’t have to ask anybody what that definition means in relationship to the products they sell. They can look at the definition and know immediately if it is or isn’t [taxable].”

“Definitions are hard to put into a computer. When I talk to state legislators, I tell them they can create whatever sales tax policies they want, but when you’re writing that law, make sure that the answer is either ‘yes’ or ‘no’ because it’s only yes or no that you can put into that computer. Everybody has brought in their sales tax system now through a computer. If the answer isn’t ‘yes’ or ‘no,’ that retailer can’t put that in their computer. There has to be a person that deals with that particular issue.”

PEC: Tell us a little more about the Streamlined Sales Tax organization.

Peterson: “We had our first meeting in March 2000 at the direction of the National Governors Association at the National Conference of State Legislatures. We were told to create a sales tax system that will be radically simpler and more uniform than it was at that time.

“We spent two years interviewing multi-state retailers asking them what made sales tax administration expensive and/or complicated from their perspective. They were the best ones to ask because each state in and of itself didn’t have a clue what made their sales tax complicated. (It’s having to collect multiple state sales taxes that makes the system complicated; so the best people to ask for the problems are the multi-state retailers.) We asked them what the problems were and then tried to arrive at one way of doing things, a sales tax administration best practice.

“There were 25 to 30 of these different areas that the retailers identified for us and we took two years to figure out how to come up with one answer for each of them. And then we spent three years trying to convince state legislatures to change their laws. That’s a very difficult thing to get done because we had to convince the state legislator that his or her sales tax was broken, and of course they didn’t believe that. And then we had to convince them that there was a better way of doing what they were doing, and they were pretty sure they were doing the best thing that anybody ever thought about doing.

“We incorporated in 2005 and became an official organization. Since then, we’ve continued with just trying to get more states to change their laws. We have 24 states now that are members. More than half of the states with a sales tax are members of Streamlined and we continue to work on getting the rest of the states.”

PEC: What requirements does membership impose on states that join your organization?

Peterson: “It imposes a lot. Georgia just joined in and its department of revenue is not particularly happy about it because of the additional work that comes from being a member. The principal thing is that each of the states agrees to do the same thing the same way. So, they all have the same definition of groceries or candy — they all have the same definition of the critical definition of sales tax, which is sales price. They all agree on how they are going to administer their different exemptions. They can have different exemptions — Minnesota doesn’t have to tax groceries just because South Dakota taxes groceries — but, in both situations, that retailer knows that the definition of groceries in Minnesota and South Dakota are exactly the same even though it’s taxable in one state and exempted in another state.

“They agree to work together to certify sales tax administration software so that it’s as accurate as is possible to make it. They then provide liability relief for the retailers that use that software and in certain circumstances, they agree to pay for that software.

“They all agree to abide by the rules. If the governing board says tomorrow that a particular item is a piece of durable medical equipment, those states that exempt medical equipment have agreed that they’re going to exempt that product, even though they might in the past have come to a different conclusion as to whether or not that was truly durable medical equipment.”

PEC: Where does your organization get its funding?

Peterson: “We are an association . Each of the member states pay dues.”

PEC: What sort of staff do you have at SST?

Peterson: “We’re very small. There are three-and-a-half employees. It’s not enough, but that’s all we can afford. It keeps us busy.”

PEC: Is it a contradiction that your organization is trying to streamline and simplify sales tax rules, but it depends on software and technology to make it all work?

Peterson: “I don’t think that’s a contradiction. I think it’s an acknowledgement that some things you just can’t make so simple that you can eliminate the need for the technology. Frankly, the technology works so well inside today’s shopping cart that even if every state taxed exactly the same thing and there was one rate in each state (which is the Holy Grail for sales tax simplicity), you’d still have to have something in your shopping cart that said, ‘I’m selling X and X is taxable in every state and I’m shipping this product to this state and that state’s sales tax rate is Y. So, my software needs to know that X is one of the things that all states have agreed to tax and that the state of shipment is the sales tax rate is Y.’

“So, regardless of how simple one gets the sales tax, you’re still going to want to build it into your shopping cart. There has to be technology because no online retailers certainly — and almost no over-the-counter retailer — is without a computerized accounting system. These things are all driven by the complexity, but they’re also driven by your accounting system. You have to be able to integrate these, and you want your computer to do that for you.”

PEC: In other words, even if there was a single tax rate and all the definitions were the same, merchants would still have to know where consumers are living, and fill out a sales tax report and send a check to that local jurisdiction?

Peterson: “Absolutely. If every state taxed and exempted exactly the same group of products and the only difference between the states was the sales tax rate, [you’d still need technology]. If you’re making shipments in different states you need to be able to distinguish between those states’ sales and charge the right rate, and then at the end of the month send each of them the sales tax deposit. You’re just going to integrate that inside your sales and accounting system because they’re so intertwined. We don’t think of it as a contradiction at all because there isn’t any other way a rational person would do it.”

PEC: Which technology vendors have been approved by the Streamlined Sales Tax organization?

Peterson: “These are listed in alphabetical order: Avalara; ADP (Automatic Data Processing); AccurateTax; Exactor; Fed-Tax, the federal tax authority at TaxCloud; and SpeedTax. We are looking for additional certified service providers.”

PEC: Have any ecommerce merchants gotten in trouble or been penalized for not collecting sales taxes?

Peterson: “Honestly, I don’t know. To be able to answer that question, I’d have to have inside state data information, which I no longer have. But, the first thing that popped to my mind was Amazon in its dilemma with the state of Texas.

“According to what I’ve seen in the newspaper, Amazon has a facility — described as a warehouse — of some form inside Texas. The state is taking the position that the facility, because it has a physical presence inside the state of Texas, creates a physical presence for Amazon.com, and that Amazon.com should have been collecting sales tax from the time when that facility began operation in Texas.

“So, it will be interesting to see where the two of them come out on this issue. Normally, physical presence is all that’s required, and in a lot of states, a warehouse is enough physical presence to require the online merchant to collect.”

PEC: Anything else on your mind today for our readers?

Peterson: “As consumers continue their shift from catalog to the Internet and from stores to the Internet, the amount of tax that goes uncollected is going to continue to grow. At some point, merchants of every sort should not be surprised that states take a very aggressive and creative approach on what each state requires someone to collect.

“In my opinion, online merchants world would be much better served if they went to Congress and said, ‘Okay, we’re willing to do this, but these are the rules,’ because that’s what the states are doing and that’s what the big brick-and-mortar stores have done with Congress, by asking everyone to collect under these rules. The online merchant industry ought to be getting in front of Congress and saying, ‘Okay, these are the rules we think we should collect under.’ There needs to be a debate because this issue has to be resolved in favor of collection. The alternative is that sales tax just dies. And if sales tax dies, everybody should like their property taxes and their income taxes because that’s all they’re going to have.”

Practical Ecommerce

Practical Ecommerce

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