Streamline Sales Tax Changes as of October 1,2006

----courtesy of Dennis Brown, Equipment Leasing Assocation

The following summary of last week's Streamlined Sales Tax Petitioning States meeting is being distributed unedited by the Equipment Leasing Association (ELA) with the permission of CCH and it's author/editor Dan Schibley.

SST Agreement Comes into Effect Oct. 1 with 18 Member States

By Daniel Schibley © 2005, CCH Incorporated

The Streamlined Sales and Use Tax (SST) Agreement will come into effect on October 1, 2005, with an initial Governing Board of 18 states, as the result of a series of votes taken at a meeting in Chicago, June 30-July 1, 2005. The member states are Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Utah, West Virginia, and Wyoming. The Governing Board will hold its first meeting on October 1 in Washington.

The Chicago meeting of the SST Petitioning States was called to vote on the petitions for membership filed by 20 states. Wisconsin withdrew its petition because the necessary conformity legislation failed to pass the Legislature. Nevada's petition was not considered because it was judged to have been filed too late to allow for adequate public comment. However, with the announcement of last minute passage of the New Jersey conformity legislation, the states gathered in Chicago were able to vote to approve the anticipatory petition filed by New Jersey. As a result, by the end of the voting, 18 states had been accepted as either a full member or an associate member, and the thresholds to bring the Agreement into effect had been crossed.

Most of the law changes mandated by the Agreement are already in effect in these states or, in the case of some of the associate members, will be coming into effect over the next couple years. On October 1, certified service providers, a centralized online registration system, and an amnesty for qualifying sellers that volunteer to begin collecting should become available. However, the SST system will remain a voluntary one as far as remote sellers are concerned unless federal legislation is enacted giving the states mandatory collection authority. Such legislation is likely to be introduced in Congress shortly, but the prospects for passage this year are considered poor.


The result of the voting represented “a significant milestone for this effort,” in the words of Charles Collins, one of the original co-chairs of the Streamlined Sales Tax Project (SSTP). The SSTP was organized in March 2000, largely in response to the states' perception that they were losing sales tax revenue from increasing online sales. Sellers without a physical presence in a state cannot be compelled to collect tax on sales destined for that state, according to the U.S. Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The stated goal of the SSTP has been to simplify and modernize sales and use tax administration in member states in order to substantially reduced the burden of tax compliance. Simplification has been desired for its own sake, but also as a means to convince remote sellers to collect voluntarily. The ultimate goal is to persuade Congress that the member states have eliminated the burdens on interstate commerce identified in Quill and, therefore, should be given mandatory collection authority over remote sales.

State revenue department administrators and business representatives have worked together in the SSTP to draft numerous simplification proposals that are embodied in the Agreement. The original version of the Agreement was adopted on November 12, 2002, by the SST Implementing States, which consists of those states that have enacted enabling legislation authorizing representatives to participate in the negotiations. The Agreement has been amended by the Implementing States three times since then, most recently on April 16, 2005.

As originally drafted, the Agreement would have taken effect once at least 10 states comprising at least 20% of the total population of all states imposing a state sales tax had petitioned for membership and it had been found that the effect of each state's laws, rules, regulations, and policies (in place and in effect) was substantially compliant with each of the requirements in the Agreement. An affirmative vote of three-fourths of the other petitioning states was necessary for a state to be found in compliance.

By late 2004, it appeared that a sufficient number of states would have conformed their laws to the Agreement by July 1, 2005, for the thresholds to be crossed on that date. Therefore, this meeting was scheduled. However, developments in the interim called this timeline into question. Opposition from local governments and small retailers to the destination sourcing of sales required by the Agreement forced Ohio, Tennessee, and Utah to backtrack and delay the effective date of their conforming changes. Moreover, as businesses began looking closely at states' conformity legislation, they were of the opinion that some states had not achieved the requisite level of compliance.

In order to preserve the timeline, the Implementing States amended the Agreement on April 16, 2005, to create a new category of associate member (described below). States found to have satisfied the requirements for associate membership are counted along with full members for purposes of the 10-states/20%-population thresholds and, as a result, the July 1 vote was able to proceed with the desired result.

Disputes Deferred

Prior to voting, the Petitioning States received findings prepared by a committee of state representatives appointed to review each state's petition and its accompanying certificate of compliance. The purpose of the certificate is to document a state's compliance with the provisions of the Agreement and cite applicable statutes, rules, regulations, or other authorities evidencing that compliance. Representatives of the business community also provided comments. Disputes involving interpretations of the Agreement that could have derailed particular states' petitions were deferred at the Chicago meeting after businesses received assurances that the issues would receive prompt resolution.

The most hotly contested issue is the interplay between the product definitions in the Agreement and sections authorizing states to create entity- or use-based exemptions. The dispute arose after Kentucky adopted the Agreement's definition of “durable medical equipment” while exempting only hospital beds purchased for non-commercial private use. Businesses argued that carving out a subset of a defined product in this way undermines the purpose of uniform product definitions. Kentucky responded that the wording of the Agreement allows it to do this. The group of states at the Chicago meeting did not have the authority to resolve the matter, but it was generally agreed there is a conflict among the relevant sections of the Agreement that needs to be resolved by an amendment or interpretation of the Agreement as soon as possible.

Another dispute involved whether a state may refuse to allow delivery charges to be allocated to taxable and exempt items on the same invoice. Businesses argued refusing to allow this would be a step backward and would increase their burden, particularly in situations involving multiple shipments of goods and tax holiday orders. Ohio justified its interpretation on the basis that delivery charges are part of the Agreement's definition of “sales price.” However, the states involved, Kentucky and Ohio, agreed to apply their policy in a “flexible” way until the SSTP meets to resolve the dispute.

Categories of Members

The following states were voted in as full members on July 1 because they have enacted all of the necessary provisions to be substantially compliant with each of the Agreement's requirements, and these provisions were in effect as of that date: Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, North Carolina, Oklahoma, South Dakota, and West Virginia.

The following states were voted in as associate members: New Jersey, North Dakota, Ohio, Tennessee, and Utah. These states have enacted all the necessary provisions to be substantially compliant with each of the Agreement's requirements; however, these provisions are not yet in effect. Absent any further intervening law changes, these states will automatically become full members upon the effective dates of their currently enacted conformity provisions, which are October 1, 2005 (New Jersey and North Dakota), July 1, 2006 (Utah), July 1, 2007 (Tennessee), and January 1, 2008 (Ohio).

Arkansas and Wyoming also were voted in as associate members. These states have achieved substantial compliance with the Agreement taken as a whole, but not with each provision in the Agreement as required, measured qualitatively. However, there is a reasonable expectation that these states will achieve complete compliance by January 1, 2008. These states must re-petition for full membership prior to that date, or forfeit their associate membership.

In addition to all of the states mentioned above, the following states, which either did not petition for membership or their petitions were not considered, continue to be members of the Implementing States: Alabama, Arizona, California, District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, Nevada, New Mexico, New York, Rhode Island, South Carolina, Texas, Vermont, Virginia, Washington, and Wisconsin.

Governing Board

As a result of the votes, the Governing Board will come into existence on October 1, 2005, composed of representatives of each of the full and associate member states. Each state may appoint up to four representatives to sit on the Board; however, each state will have only one vote. The Board will administer the Agreement, elect officers and directors, and allocate the costs of administration among the member states.

Pursuant to the compromise crafted at the April 16 meeting, the Implementing States retain the exclusive power to amend the Agreement and issue interpretations of it until a sufficient number of states have become full members to cross the 10-states/20%-population thresholds without counting associate members. Once this occurs, the full members on the Governing Board take over responsibility for amending and interpreting the Agreement, while the Implementing States will continue to exist for a period of time as an advisory body.

On October 1, when New Jersey and North Dakota automatically shift from associate to full membership as their legislation takes effect, the Governing Board will cross the thresholds counting only full members. As a result, at its initial meeting the Board will assume full administration of the Agreement from the Implementing States (although the remaining associate members on the Board may not vote on amendments or interpretations). Nevada's late-filed petition also is likely to be considered on October 1, and it may well become a full member that day as well.

Other October 1 Events

A State and Local Advisory Council will formally come into existence on October 1. This will include one representative from each state involved in the SSTP (currently, every state with a general retail sales tax except for Colorado and Idaho). The Council will also have local government representation. It will advise the Governing Board and the Business Advisory Council on matters pertaining to the administration of the Agreement. The Business Advisory Council is an entity that will be “recognized” by the Governing Board for the purpose of providing private sector input. A prototype already exists in the form of the business representatives who have been participating in the SSTP almost since its inception.

Among the first tasks of the Governing Board will be the approval of certified service providers (CSPs) and the execution of contracts with them. Several companies seeking to be certified have responded to a Request For Proposal (RFP) and a review process is underway. The CSPs will offer taxpayers new technology models for the collection and remittance of tax. The contracts with the Board will provide CSPs with a monetary allowance funded from the money they collect under the SST system. The Board is unlikely to approve any certified automated systems (CASs) on October 1, as review of this “off-the-shelf” collection software is not as far advanced as the CSP review.

Once the Agreement is in effect, sellers will be able to use a centralized online registration system. By registering, a seller agrees to collect and remit tax for sales into all full member states. Associate members will not have access to the seller registration information. A seller that is not otherwise required to collect tax on sales into associate member states (i.e. a remote seller) may, however, volunteer to do so. A seller that volunteers to collect tax in an associate member state is not required to collect tax in any other associate member state. Associate members will not have access to the information from the planned joint audits, unless that state is a party to the audit.

A member state must provide an amnesty for uncollected or unpaid sales and use tax (together with penalty or interest) to a seller that registers under the Agreement, provided the seller was not registered in that state in the 12-month period preceding the state's participation in the Agreement. The seller must register within 12 months of the state's participation to benefit, and the amnesty does not apply to matters for which the seller has received notice of the commencement of an audit. Associate members must provide an amnesty from the date they become an associate member until 12 months after they have become full members. Recently, various sellers have been negotiating amnesties along these lines on a state-by-state basis with SSTP participants but, as of October 1, member states must make these amnesties available to all qualifying “volunteers.”

Outstanding Issues

The SSTP plans to meet, probably in August, to address several remaining issues, including the dispute over the allocation of delivery charges (discussed above), the definitions of “digital good” and “digital equivalent of tangible personal property,” purchaser use tax issues, and the completion of various issue papers to provide guidance on the interpretation of previously approved concepts.

Other matters that need to be resolved include the interplay among the Agreement's product definitions and sections governing entity- and use-based exemptions (discussed above); the completion of the online registration system and CSP testing; approval of the guidelines member states will be required to adopt in rules or regulations for the interpretation of the “food” definitions; audit procedures; the amount of compensation for the cost of collection; and the procedures for requesting and issuing interpretations of the Agreement. Work on all of these is expected to continue over the next three months in anticipation of the meetings of the Governing Board and the Implementing States on October 1, 2005, in Washington.

Streamlined Sales Tax Petitioning States Meeting, Chicago, June 30-July 1, 2005


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