The Coalition for Appropriate Sales Tax Law Enactment (CASTLE) is a Texas based organization managed by the Celero Group that is among those representing local governments at Streamlined Sales Tax meetings. Often what business views as change to modernize sales tax processes, the CASTLE organization envisions as infringement on the authority of local government.

Although business at times finds positions taken by CASTLE as barriers impeding advancement toward streamlining, local governments see the organization as among those fighting for their continued autonomy of pursuits regarding the business community. Presented below is the unedited report sent by CASTLE to local governments following the recent meeting in Washington , D.C. John Kroll has kindly made this report available for distribution. It provides a view of the process in the words of an organization representing local governments. Circulation of this report does not signify concurrence with the views expressed.

C oalition for A ppropriate S ales T ax L aw E nactment

Date: April 18, 2005

From: John Kroll, Celero Group

To: CASTLE Members

Re: Streamlined Sales Tax Update

The Streamlined Sales Tax Implementing States (SSTIS) Committee met in conjunction with the National Conference of State Legislators' (NCSL) Task Force on Telecommunications and Internet Commerce Committee at the NCSL Spring meeting in Washington D.C. , April 16 th . The stated purpose of the meeting was to consider filed amendments to the national Streamlined Sales Tax Agreement (Agreement).

The Agreement contains specific language with regard to sales and use tax administration, collection and the manner in which the Agreement will be interpreted, administered and enforced. Section 901 specifically addresses how the Agreement may be changed or amended:

Section 901: Amendments to the Agreement reads: Amendments to the Agreement may be brought before the governing board by any member state. The Agreement may be amended by a three-fourths vote of the entire governing board. The governing board shall give the Governor and presiding officer of each house of each member state notice of proposed amendments to the Agreement at least sixty days prior to consideration. The governing board shall give public notice of proposed amendments to the Agreement at least sixty days prior to consideration . The governing board shall provide an opportunity for public comment prior to action on an amendment to the Agreement.

The participants in the Streamlined Sales Tax (SST) effort have rigorously defended the Agreement in the past. Many states, including Texas , have found that any deviation from the letter of the Agreement is viewed as non-acceptable. Texas in not considered to be in “substantial compliance” because it has been told in the past that it needs to conform with the Agreement “down to the letter.” Yet, the manner in which the Implementing States and business community considered amendments to the Agreement in Washington last weekend suggest a shift in reasoning.

Given the new relaxed standard for Agreement adherence, there may still be hope for the 55% of the U.S. population that live in an origin state. Few of the substantive changes to the Agreement made in Washington D.C. bear any resemblance to the proposed amendments that were provided to the states and the public within the sixty day timeline called for in the Agreement. In fact some of the changes put to a vote on Saturday were drafted that very morning. Many delegates, including those representing Texas , first saw many of the proposed amendments only after the meeting began.

The State of California , following its open meetings laws, was unable to cast a vote on most amendment proposals offered at the meeting. California law prohibits its delegate from casting a vote on a change to the Agreement that did not provide the opportunity for public comment by California citizens.

Senator Leticia Van de Putte and Robin Corrigan from the Comptroller's office represented Texas at the meeting. They were diligent in conveying the concerns of the Texas legislature and Texas citizens at the meeting. Texas only supported those sensible amendments to the Agreement that received a full sixty day notice and were of a technical correction nature. The Texas delegates were unable to support various changes to the Agreement providing no benefit to Texas . Texas did not support proposals that were revealed on the day of the meeting.

Other state delegates to Implementing States meeting appeared less concerned about full disclosure, inclusive negotiations or public input concerning last minute changes to the Agreement.

Proposed amendments vs. Adopted Amendments:

CASTLE has long supported technical corrections and other well reasoned amendments to the Agreement that streamlined compliance, administration and costs savings by both the public and private sector. However, CASTLE certainly desires that all changes to the Agreement follow the public notice and posting rules found within the Agreement itself. CASTLE's position on correctly filed amendments: Support amendments #'s 1, 2, 4, 5, 6, 7, 11, 12, 13 and 14; oppose amendments #'s 3, 8, 10 and 16; and take no position on #'s 9 and 15.

Four amendments were filed within the proscribed sixty day public comment time frame dealing with sourcing or State membership in the Agreement. Most of the other amendments were technical corrections, simplification for the business community, or dealt with mundane administrative matters of the Agreement and Governing Board.

On the morning of the meeting, the participants were informed that relevant states and/or the business community had withdrawn various amendments, or had substitute language that would combine amendments. The next section of this report focuses on the amendments most specifically related to CASTLE.

Amendment #3 – Offered by Tennessee

Section 309. The amendment would delay the date by which states must enact destination sourcing until Dec. 31, 2006 .

Background: Current law in Tennessee requires the enactment of destination sourcing on July 1, 2005 . Tennessee , which passed destination sourcing in a previous legislative session, has had several years to prepare for the switch to destination sourcing. Tennessee also witnessed the hardship faced by Kansas two years ago as Kansas moved from origin to destination sourcing.

As the sourcing deadline in Tennessee approaches, significant opposition from local governments and the small business community has lead to at least eight bills filed in the Tennessee Legislature that would repeal or significantly delay destination sourcing. The Governor, in his state of the State address also supported a delay in destination sourcing. Delaying destination sourcing in Tennessee has broad bipartisan support. Without this or a similar change, Tennessee would likely pass legislation that would take it out of substantial compliance with the Agreement.

CASTLE Position: Oppose the original amendment. The amendment does little to address the fundamental problems small businesses and local governments encounter under intrastate destination sourcing. The amendment only postpones the date by which these problems must be addressed by the member states. The postponement takes the form of an administrative rule change to the Agreement primarily designed to allow Tennessee to maintain its leadership position among the participating states and give the impression to Congress and the general public that the Agreement has “momentum” and is a viable compact in its current form. If the Agreement were in fact viable and good for local governments and small businesses in Tennessee , then there would be no need to postpone the enactment of destination sourcing, which was passed by a previous legislature.

Amendment #8 – Offered by Ohio

Section 330. The amendment adds a completely new section, 330, that would create a transition period for small businesses to move from an origin to a destination based system.

Background: The amendment seeks to allow a small business exemption to the destination sourcing requirements of the Agreement. Destination sourcing would be phased in for businesses depending upon sales volume. The smallest retailers would have until December of 2008 to implement destination sourcing. Remote sellers, shipping products into Ohio would not have to collect local option sales and use taxes but would be required to collect state sales and use taxes.

Small businesses in Ohio , especially some Amish businesses who make limited use of technology, have expressed opposition to a move from destination to origin sourcing. These small businesses have convinced members of the Ohio legislature to file bills that would delay destination sourcing for small businesses. The delaying legislation has broad support in the Ohio Senate. Without this or a similar change, Ohio could pass legislation that would take it out of substantial compliance with the Agreement.

CASTLE Position: Oppose the original amendment . The amendment does little to address the fundamental problems small businesses and local governments encounter under intrastate destination sourcing. The amendment only provides temporary relieve for certain small businesses. The amendment does nothing to address the problems that local governments face as a result of mandated destination sourcing.

Amendment #10 – Offered by South Dakota

Section 710: The amendment allows a state who has passed SST compliance legislation, but has not yet enacted SST compliance legislation, to be counted toward the population requirements required for the Agreement to go into effect.

Background: South Dakota , a net importing state that will gain significantly from interstate destination sourcing, does not want to see the Agreement falter. This amendment would allow states like Utah , who has passed the Agreement but twice delayed the effective date of destination sourcing due to significant local government and small business opposition, to be counted toward the population requirements for SST national enactment. Ohio and Tennessee are also likely to pass legislation that would take them out of compliance with the Agreement. Without a change to the Agreement allowing membership concessions for those states, the Agreement does not have sufficient population to achieve enactment. Therefore, the Agreement falters and states like South Dakota will be unable to request remote sales tax collection authority from Congress.

In a honest explanation of the Amendment and its motive, South Dakota said: “Several issues have arisen recently that might impact the effective date of the Streamlined Agreement. An amendment may be necessary to allow the Agreement to go into effect.”

CASTLE Position : Oppose the original amendment . The amendment only provides a technical crutch designed to prop up the Agreement by allowing non conforming states to count toward the Agreements 20% population requirement. The effect of the amendment is to give the public and Congress the impression of positive momentum, when legislatures in Ohio , Utah and Tennessee have demonstrated otherwise. The amendment does nothing to address the problems that local governments face as a result of mandated destination sourcing.

Amendment #16 – Minnesota

Section 801: The amendment allows a state who has not adopted the uniform health care definitions of the Agreement to become a full member of the Agreement.

Background: Minnesota has not adopted the Uniform Health Care definitions as a part of its SST compliance legislation. There is some opposition to the definitions and debate among the states as to how the health care definitions may be interpreted. Without this change, it will be difficult for Minnesota to adopt the appropriate definitions prior to the arbitrary July 1, 2005 date set for the enactment of the Agreement.

CASTLE Position: Oppose the original amendment . The amendment creates yet another exception for compliance. CASTLE opposes any amendment creating an exception for Agreement compliance that does not address the fundamental problem of intrastate sourcing.

Meeting Results

Amendments #8, #10 and #16 were withdrawn by their sponsor states. Amendment #3 was withdrawn by Tennessee and a substitute, drafted on the morning of April 16 , 2005 was offered in its place. The substitute amendment, addressing a completely different section of the Agreement, (Original Amendment #3 changes Section 309 of the Agreement. The substitute to Amendment #3 changes Sections 701-705 of the Agreement. ) allows the SST to claim state population far beyond that which has actually conformed its laws to the letter of the Agreement.

The substitute amendment creates an “Associate Member” category that will allow a state to be counted toward the Agreement's population requirements. Associate members will not have the authority to vote on all issues before the Governing Board. Nor will associate members automatically receive voluntary collections from business filers. However, Associate members are required to grant amnesty to voluntary member filers under Section 402 of the Agreement.

Conclusion

The Amendment allows participating states to now enact the Agreement on October 1, 2007 and begin to receive remote sales tax collection from voluntary remitters. This will also give the SST sufficient grounds to request compulsory remote sales tax collection from businesses with nexus in member states.

The practical effect of these amendments and the current language in Agreement make it very difficult, if not impossible, for CASTLE to support the Agreement and its adoption by the State of Texas .

CASTLE members must consider supporting, opposing, or changing any Streamlined Sales Tax bills pending before Congress. CASTLE should also consider the possibility of forming a similar multi-state compact with other States who's concerns have been dismissed and ignored by the Streamlined Sales Tax effort.