North Dakota Senator Leads National Sales Tax Project
Quick, what’s six-point-five percent of $171 billion.
It’s about $11.1 billion.
That is approximately the amount of sales and/or use tax revenues that would be due states, counties and cities on the ecommerce activity on the Internet this year, if it were all collectable, based on an average 6.5 percent sales tax across the United States. But collecting sales tax on Internet transactions has been a major problem. That fact and the growing number of tax dollars slipping through the cracks like gold dust through the floor of the assay office, is chafing the 7,500 or so collectors around the United States.
Back in the early 1990s when the Internet first started to produce sales and the whole dot-com thing rose from the launching pad like a Saturn rocket, few taxmen noticed, partly because few people at that time really thought anything would come of the notion that people would do their shopping in cyberspace. There were, however, a few who took notice and took action.
It was obvious to many, not the least of whom were the ecommerce sellers, that collecting sales and use taxes on Internet transactions was about like trying to catch water in your fingers—your fingers get wet, but most of the liquid just goes on by. Some ecommerce retailers just ignored the whole issue. Some tried to comply often to their detriment. The matter festered. Tax collectors get cranky when they see unpaid taxes floating about. A tax collector in North Dakota took up the challenge and demanded that Quill, an out-of-state office supply company, collect and pay sales or use tax on goods sold in his state from the company’s catalog. Quill balked and took the state to court and won. They didn’t win on the basis that they shouldn’t have to charge and collect sales tax. Rather, the Supreme Court of the United States said the sales tax laws in the thousands of taxing entities were so complicated that no business could be expected to comply without error and great hardship. The court told the taxmen (et all) to get their own houses in order before they should or could expect anyone to play by their rules. That was in 1992 and the decision was applied to subsequent Internet transactions as well.
The result of that court ruling was the eventual formation of the Streamlined Sales Tax Project. The project has finally produced an agreement between 44 states, so far, on uniform sales and use tax rules that would make it easy for ecommerce sellers to comply. North Dakota State Senator Dwight Cook of Mandan, N.D., serves as the President of the project, which worked for the past half dozen years to develop the streamlined method of calculating, collecting and distributing sales and use taxes on remote transactions. It was not an easy task at all.
Everyone was operating on a sort of honor system when it came to collecting and remitting sales and use taxes. When our state filed suit against Quill, the Supreme Court eventually said that because of the complexity of the regulations and tax rates of the thousands of taxing entities, enforcement would place undue burden would be placed in the remote sellers.
PeC: So the court put the onus back on the tax collector but didn’t necessarily absolve the seller or the user from a tax burden.
Cook: That’s right. So we as state legislators and tax collectors had to come up with a way to get everybody on the same page if we were going to collect those taxes. The National Conference of State Legislators and the National Governors Association all set about to find a way to overturn North Dakota vs Quill. They came up with the concept of each state passing a piece of legislation that would, in effect, get all the states to the table to deal with the cumbersome tax policies we had.
PeC: Easier said than done?
Cook: You bet. We were dealing with more than 7,000 taxing entities, everyone had a different take on what was taxed and, of course they all had different tax rates. In some states the state collected all of the tax and distributed it. In others, cities and counties collected their own. We also had, for example, days and days of discussions about candy. Is candy a food and should it be taxed? Different states had different rules on candy and other confections. Tobacco was a big deal. Another issue was where do you apply the tax—that’s called sourcing? Do you tax the transaction in the state where seller is or where the buyer is located? That was perhaps the most contentious matter we had to deal with. The agreement among the 44 states signed on the project sets sourcing at the point of receipt. But it was a difficult decision to reach.
PeC: So, to satisfy the court, which said you had to have 10 states, equaling 20 percent of the population represented in an agreement, we have, at this point 44 states, who have signed an agreement that says this is how much we want to collect and this is where it is to be collected. But how is the process streamlined for the ecommerce seller?
Cook: There are two ways to make it easy for sellers to comply. One is software and the other is simplified laws. I would say that what the project produced is a hybrid of the two. We have certainly tried to simplify our tax laws so that they are more uniform from state to state. But, the biggest part of the project was the development of software solutions. There are two terms you are going to want to become familiar with. One is called the Certified Automated System (CAS), that is software that you could purchase and install on your system that would allow you to collect and remit sales tax to all of the states in which you sell.
The other is called the Certified Service Provider (CSP). The CSP is a new industry that we created that is a third party collector of sales tax. So now, as a retailer, an ecommerce seller, you can hire a service provider to collect and remit all of your sales tax. At this point the retailer can go on line and register one time for all of the states that are part of the project at this time and in the future.
PeC: So the seller’s collection and auditing liabilities are with one entity instead of 50?
Cook: That’s right. Before, if you sold in more than one state you would have had to register, submit reports, know the laws and perhaps be audited by all of the states in which you sold goods. The CSP collects the taxes and remits them to the states, who then pass them along to the various other entities such as cities.
PeC: So, once registered and in the system, the retailer continues to do business as usual with the sales tax part of the transaction being somewhat transparent. But what is the cost to the seller?
Cook: This is one of the details we are still working out. It was always our goal to make it such that when a retailer hired a CSP they would do so at no cost to themselves. We didn’t know what it would take to cover the cost of having the CSPs. One of the things we found out is that the cost is higher than we thought it would be, which is the reason for the delay. Right now we are negotiating with some companies who have Certified Automated Systems and who would like to be CSPs. We have not signed a contract yet. There most likely be more than one company that provides the service.
PeC: When do you think the CSP companies will be ready to start collecting taxes?
Cook: We’re looking at the first of the year.
PeC: The Sales Tax Simplification Agreement became effective on October 1. What exactly happened?
Cook: Of the 44 states involved in the project, 19 of us have actually changed our taxes laws and are in compliance based on the agreement generated by the project. Those states are the Governing States. On October 1 we had arrived at a point where we had 13 states with 20 percent of the population (of the country) in full compliance and that meant that someone could register with all 13 at one time. And we could get started.
PeC: Lets say that an ecommerce seller wants to come into full compliance even though they have not been in compliance and may have a sales or use tax liability. Is there a mechanism by which they can get some relief from potentially catastrophic liability?
Cook: We have an amnesty program. A seller can visit a special website, where they can register to collect taxes for the 13 states who are in compliance. The information provided by the seller will be sent electronically to all of the full member states and to associate member states for which the seller has chosen to collect the sales or use tax. Amnesty is available for sales or use taxes uncollected or unpaid on sales by retailers for any period prior to registration through the Streamlined Sales and Use Tax Central Registration System. There are some exceptions and some specific things the sellers must comply with to receive amnesty. They can get all the information at the website.
PeC: Here’s at two part question. There are still the majority of states which were in on the project who are not in compliance. Will they be soon? And what about the other six holdouts?
Cook: Those original signature states who haven’t complied are still involved in changing laws and getting the local entities involved and in agreement. I think it will be sooner than later. They all want to start collecting the money. As far as the other six states. I think we’ll see them all on board sometime in the near future. It is essential if they are going to be efficient at collecting their sales and use taxes from Internet sales.