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A Tax to Grind

Will there be a sales tax standard to simplify the process?
Magazine Contributor
2 min read

This story appears in the June 2001 issue of Entrepreneur. Subscribe »

While the debate over whether sales taxes should be imposed on Internet sales continues in Congress, state governments are attempting to simplify the processes in place at their level. Sales and use taxes are the biggest single source of revenue for state and local governments. With the explosion in growth of e-commerce, state and local governments are worrying that too much tax revenue goes uncollected.

So 32 states recently created the Streamlined Sales Tax Project (SSTP), which plans to design, test and implement a simplified system of collecting sales tax that can be easily applied to all types of commerce, including e-tailing. Sounds ambitious, and it is. Though no time frame has been established, insiders say it may take several years to accomplish meaningful tax simplification. Still, you should watch this initiative closely because it will have an impact on your business.

Originally, SSTP participants intended to create uniform tax base definitions to alleviate complications. For example, peanuts might be a taxable snack item in one state but a tax-exempt grocery item in another state. Standardization hasn't happened yet. "The delay isn't good for many businesses because the uniform definitions would allow companies to easily determine whether a transaction is subject to sales tax," says Jeffrey A. Friedman, a state tax specialist and partner in KPMG's e-Tax Solutions practice.

Also in the works is a four-state pilot project to help determine the cost and effectiveness of technologies that can automate the calculation and payment of sales tax.

At least SSTP participants have agreed on one issue. They will retain the "sourcing rule," under which most sales of goods will still be taxable based on where they are delivered. In addition, if sellers don't know which tax jurisdiction applies to a sale, they use the state in which they are actually located, says Friedman.

How will the project fit in with what Congress passes on Internet sales taxes? While Congress can override state efforts on sales tax simplification, it has historically avoided doing so. "At this point," says Friedman, "it's hard to say whether lawmakers will change their approach."

Great Falls, Virginia, writer Joan Szabo has reported on tax issues for more than 14 years.

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