Lending a helping hand: two governments can work together.

The states have long recognized that the sales tax base is eroding due to increases in remote commerce and sales not subject to sales/use tax in any state. The Streamlined Sales Tax Project (SSTP) was created to reverse the decline and to prod Congress to change the law to reverse the base erosion. The project itself seeks to simplify and modernize the collection and administration of sales and use taxes, and it is a current example of where cooperation between federal and state governments could have a significant impact on tax collections and tax efficiency. Its key features include rate simplification, uniform definitions of sourcing rules and audit procedures, uniform definitions of key categories such as "food" and "drugs," and state-level administration of taxes and funding of the system.

Vendors without nexus are not required to collect and remit sales and use taxes on remote sales. The current sales and use tax landscape includes thousands of taxing jurisdiction with dozens of different definitions of sales taxable items and hundreds of different rates. Without very advanced software and streamlined reporting and tax remittance procedures, the compliance burden for small and large businesses alike would be overwhelming and cost prohibitive. The hope is that simpler and more efficient administrative procedures would reduce the compliance burden on businesses, and businesses would voluntarily comply with the sales and use tax systems of participating states.

When the SSTP was first formed in 2000, most businesses and policy makers were skeptical that states could ever agree on a comprehensive simplification package and pass conforming legislation. Today, 22 states, including 15 full members and 7 associate members, have passed all or most of the required Streamlined Sales and Use Tax Agreement (SSUTA) simplification recommendations. (20) Since October 2006, voluntary vendor participants in the SSTP have remitted sales/use tax collections of approximately $66.5 million to the states.

The long-run goal of the SSTP is to convince Congress to give states the authority to collect sales and use taxes from remote vendors. Several bills have been introduced in Congress to get its consent to the SSUTA. (21) In June 2006, the Streamline Sales Tax Simplification Act (S.2153) authorized member states of the SSUTA to require remote sellers to collect and remit the sales and use taxes on sales to the member states. All bills have been rejected primarily due to concern for small businesses, Internet businesses, and impacts on local governments. There is also significant concern that the costs to implement the rules will outweigh the increase in revenues.

Federal legislation to adopt the SSUTA would have many advantages. First, the legislation would shift the compliance burden from consumers (who are obligated under current law to pay use taxes) to sellers and, therefore, reduce the number of taxpayers. It would also simplify the compliance burden for businesses currently complying with the sales and use tax system. (22) This in turn would reduce the administrative and audit burden on states and businesses. In addition, proposed legislation would significantly reduce complexity in dealing with multiple jurisdictions in the 50 states. Finally, the legislation would also close a growing loophole that encourages tax avoidance. Adoption of the SSUTA would collect taxes equally from all retailers, reducing the inequity between Internet firms and brick-and-mortar firms. (23)

Probably the biggest disadvantage of the SSUTA is loss of autonomy at the local level. (24) Local governments generally support federal legislation allowing states and localities to collect taxes on remote sales, but prior bills have been perceived as harmful by the local governments. For example, the Agreement requires local governments to simplify telecommunication taxes, a major source of revenue for local governments. The SSUTA also requires state-level administration and uniform sourcing rules, which require destination sourcing. The destination-sourcing rules result in winners and losers.

There is much work still needed as the SSTP continues to address thorny issues; however, the SSTP is a move in the right direction. The SSTP is a good example of how states and the federal government might be able to come together to improve the sales tax system while maintaining the essential autonomy states require. The SSUTA forced states to accept common definitions of broad categories of tangible products but still allowed them the option to include or exclude each category from the sales tax base as well as flexibility on the rate of tax. Essentially, the participating states agree on where and how to disagree. The federal government's role is to require consistent sales/use tax treatment of all retail sales when such treatment is administratively feasible.

Business Nexus Standards

Businesses have become more adept in recent years at planning strategies that take advantage of currently accepted nexus standards to lower their overall state tax liabilities. Partly in response to these effective planning techniques, states have begun to assert various expanded nexus standards, including "doing business" standards and asserting nexus based merely on the presence of intangible property. The various nexus interpretations cause uncertainties for multi-state corporations and exert a significant compliance burden. Businesses have responded to the uncertainty by asking Congress to establish bright-line standards based on physical presence that sharply limit states' ability to assert nexus. These proposals extend the protection of P.L. 86-272 to services and other types of activity and have been highly criticized because they narrow the base further and encourage tax planning and economic inefficiencies. (25)

The alternative for states might be a cooperative effort similar in concept to the SSUTA, although on a much smaller scale. The goal would be simplified, bright-line standards that broadly satisfy state demands to assert nexus on businesses with a substantial economic presence, but standards that are not as encompassing as the most aggressive state positions. Developing such standards would give Congress a reasonable alternative that satisfies the businesses' desire for a workable and fair nexus standard, but also preserves the states' authority to levy tax on businesses from a state's public infrastructure.

A similar policy framework for other income tax issues may also be needed to bring about substantial further improvements in the cooperative relationships between the federal and state governments and a more efficient system. There is a current disagreement on several broad issues including nexus, definition of the taxpayer (e.g., required combined or separate reporting), and apportionment, as well as on important issues of the tax base (e.g., depreciation). As is the case with the SSUTA, states would be free to assert their autonomy, but the divergences would be along agreed upon lines. The current situation has lawmakers in the federal government and the states operating independently, with only a passing thought given to the other taxing jurisdictions. The result is a system that broadly taxes income, but in as many different ways as there are taxing jurisdictions. These differences may prohibit many desirable cooperative efforts (e.g., joint audits).

Multistate Tax Commission Initiatives

The Multistate Tax Commission (MTC) is a voluntary intergovernmental state tax agency that has been working since its inception in 1967 to preserve "the authority of states to determine their own tax policy within the limits of the U.S. Constitution" and to "administer, equitably and efficiently, tax laws that apply to multistate and multinational enterprises." (26) The MTC currently has five new proposed model statutes and six uniformity projects that help promote uniformity or compatibility in significant components of state tax systems. For example, the MTC offers extensive assistance to both states and taxpayers on nexus matters, both by serving as a convenient source of information to taxpayers with nexus questions and by providing a clearinghouse of sorts to resolve nexus issues.

The MTC also operates directly on behalf of states through the Joint Audit Program. States select corporate audit targets, generally a multistate business, and MTC staff performs the actual audit and forwards the audit results to the states, which can act on the results as they see fit. The program functions as a joint audit by several states, relieving the separate states of the need for several duplicative audits of the same taxpayers. Furthermore, taxpayers must only deal with a single comprehensive evaluation rather than the uncertainty of dealing with audit staff from several states.

Tax Shelter Penalty Statutes

The recent battles by governments at all levels against abusive tax shelters provide good examples of effective intergovernmental cooperation. The federal government led the way by identifying and publishing specific abusive transactions and subjecting those transactions to additional penalties. They also imposed new penalties, which were adopted by many of the states. States and the IRS then worked together to identify the participating taxpayers and promoters and then quickly shared the information with all interested parties. The coordination also extended to training and education, and included sharing audit results across governments. The undisputed result was that the combined efforts were much more successful than they would have been had the parties attempted to tackle abusive tax shelters on their own.