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DMA Council Regulatory & Legislative Update: Streamlined Sales & Use Tax Agreement
Takeaway notes from DMA webinar. By Aliza Bornstein, copywriter, Melissa Data

Individual states are battling budget deficits. There are two weapons of disposal right now: SSUTA (Streamlined Sales & Use Tax Agreement) and NEXUS (Affiliate Tax). They both address issues surrounding NEXUS. Nexus is a term used when an out-of-state company has sufficient contacts with a given state allowing the state to require the company to collect and remit sales tax on taxable sales.

The revenue for state taxes is down 17 percent overall, and state sales tax revenue is down 9 percent. To get a better understanding of what the states can and can’t do right now—and what’s at stake—you would need to go back to the US Supreme court ruling in 1967.

The 1967 ruling held that imposing tax collection duties on out-of-state sellers would violate U.S. Commerce Clause protections against undue burdens that impede interstate commerce. That was reaffirmed in 1992 with Quill vs North Dakota.

Quill vs North Dakota held that states lack the authority to force out-of-state firms to collect sales and use taxes, unless those companies have physical presence in the state, such as owning property or employing workers in that state.

Quill vs North Dakota states that the consumers are responsible for paying applicable local taxes. Quill also included a provision allowing Congress to pass federal-use tax laws, even if those laws would, in effect, overturn Quill.

Affiliate taxes vs SSUTA
Customers can go through an affiliate by visiting an affiliate’s Web site, and then be directed over to the brand or the seller, where they would make a purchase. That brand or seller would then compensate the affiliate with a percentage based on that purchase.

This is typically a state-by-state issue. What the states are contending is the presence of an affiliate in a state constitutes NEXUS. The affiliates also believe this constitutes NEXUS in the eyes of the states. The tax is then subject to the location of the affiliate, and applicable to all sales generated from that state, not just those sales generated through the affiliate.

The SSUTA agreement is a group of states (an organization) moving towards their goal of streamlined taxes; however, they are anything but streamlined. It is important to note that there are already 23 full or associate members of the SSUTA.


There are economic pressures pushing states to join SSUTA. It would require any remote sellers to collect and remit sales taxes to all states, with or without NEXUS. This would require congressional action and the DMA contends this is not yet streamlined. The SSUTA Governing Board is granting exceptions to many of the states, thereby increasing the complexity.

One of the big studies conducted supporting the SSUTA was the University of Tennessee study. It was most recently updated in 2009, and it estimates that the tax revenue losses for all states combined will exceed $11 billion per year, by 2012. They contend this is an opportunity lost, as the “untapped tax bounty is only likely to grow.”

How easy is it to execute the SSUTA if the states really want it?
It seems pretty simple. You would just charge sales tax for purchases made over the Internet, just as if the consumer had walked into a local store. But right now, it’s not that simple. Which state would collect the sales tax? The state where the consumer lives, or the state where the company is located? Or the city where the call center took the order? How about the county where the warehouse shipped the order from?

The US has more than 7,600 taxing jurisdictions, and that’s where the cities and the counties all come into play, making this very complicated. Each of those cities and counties have their own rates and definitions of taxable items. Some states may exempt food purchases, while cities within the state define tax-exempt food items very differently.

Many cities are now exempting clothing from sales taxes, but vary in the types of exempt apparel. For example, in the state of Connecticut, most clothing costing less than $50 is exempt. In New Jersey, clothing and accessories made from fur valued at $500 or more are subject to sales tax. In the state of New York, clothing under $110 dollars is exempt from state tax, yet 51 of 62 counties in NY charge tax on all clothing.

The SSUTA is still remarkably “un-simplified.” It does little to reduce the 7,600 different state, county, and city taxing jurisdictions. In fact, the SSUTA allows for a different rate for each ZIP Code™ and is filled with ever-changing rule exemptions, processes, and procedures; all of which are being used to encourage states to join in on the program.

Small businesses and entrepreneurs will be disadvantaged by a distant sales tax collection regime that forces the consumer to comply with thousands of different rates, laws, filing instructions, and audit procedures.

How has the DMA been involved in this project?
The DMA has contributed suggestions from the onset, setting forth in a letter to project leaders in August 2000 a comprehensive list of reform proposals. Of more than 30 specific reform proposals offered by the DMA, the agreement approved by the states fully adopted only two: centralized registration; and uniform bad debt provisions.

The big question that we face is: Do catalog companies and electronic merchants have an unfair advantage over traditional retail stores, including “big box” retailers?

The DMA contends it’s not an unfair advantage because the tax is still owed. When a company has no physical presence within a state and receives no benefits from state and local government services, it is improper for the state to delegate the tax collection responsibility to the out-of-state company. Instead, the state must collect any tax due directly from its residents.

Have state governments overstated the amount of tax revenue they are losing as a result of current constitutional restrictions on their taxing power?
The DMA’s view is that states have really overestimated the amount of tax that they are not collecting, due to the fact that Congress will not allow the states to force out-of-state retailers from collecting tax.

It is the DMA’s view that the University of Tennessee study is severely flawed.
• It does not sufficiently account for online B-to-B sales, most of which are either non-taxable sales for resale or are sales for which a use tax is generally reported directly to the state by the business purchaser.

• It grossly overestimates the total amount of online B-to-C sales.

• It fails to properly account for the portion of B-to-C commerce that is not subject to sales tax (principally sales on non-taxable services).

• It underestimates the level of B-to-C sales in which sales tax is collected (such as online travel sales).

• It does not take into account the increase in tax collection by Internet sellers that also have retailer stores.
There’s an abundance of sales tax that’s collected that dramatically reduces the amount of “tax revenue loss” that the states are claiming through the Tennessee study.

Why did the states abandon their effort to achieve “high bar” reform of their tax systems?
Politically, there are reasons within a state to have different tax rates for different jurisdictions, and it’s set up in the political organization of several states. This makes it increasingly difficult to create some type of streamline sales tax regime across the country that would make it easier for those states to try and convince Congress that they should allow the states (those who joined the SSTUA) to require out-of-state sellers to collect taxes.
• Unfortunately, the high ideals of SSTP organizers were eroded by the political realties of having to gain the endorsement of state legislatures, municipal officials, and political constituencies.

• The SSTP repeatedly retreated from original proposals for dramatic tax reform and consistently rejected or diluted provisions that would have produced substantial uniformity among the states.

• The result is a “low-bar” agreement that contains only minor, and in many instances, cosmetic tax reform measures.

• Rather than a truly uniform system, the SSUTA perpetuates, and in many respects, aggravates a taxation system of tremendous complexity.
Taxation without borders results in cost, complexity, confusion, and conflicts. States could favor taxation over federalism by pressing Congress to adopt a single, uniform national sales tax, and distribute the proceeds among the states.

There has never been a time when it has been more important for Congress and the Supreme Court to support the original intent of the Commerce Clause, which was to create one national marketplace in which goods and services move freely.

To stay informed on this issue and learn more about DMA Councils please visit http://www.the-dma.org/segment/

---Source: Direct Marketing Association webinar on Nov. 10, 2009 (www.the-dma.org). Jerry Cerasale is senior VP of Government Affairs (jcerasale@the-dma.org). Neil O’Keefe is VP of Multichannel Segments (nokeefe@the-dma.org).
 

Melissa Data


 
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