The following summary of the Streamlined Sales Tax meeting in Dallas is being distributed by the Equipment Leasing & Finance Association (ELFA) with the permission of CCH and its author/editor Dan Schibley

 

SST Agreement Amended to Provide Origin Sourcing Option

By Daniel T. Schibley © 2007, CCH Incorporated

 

In the most significant course change since its launch, the Streamlined Sales Tax (SST) Governing Board has amended the SST Agreement to allow states that meet specified requirements to become full members while continuing to source sales on an origin basis. The unanimous vote by the full members of the Board came at the end of three days of meetings in Dallas, December 10-12, 2007. The Board and its predecessor organizations rejected repeated attempts in the past to change the Agreement to allow origin sourcing, most recently at its meeting in Kansas City, Kansas. However, the Board relented when confronted with the impending loss of at least two associate member states, uncertain prospects for adding further states, pressure from local governments, and a divided business community.

The only other significant action taken by the Board in Dallas was its acceptance of Nevada's petition to become a full member, effective April 1, 2008.

Status of Board Members

Currently, the Board has 22 members: 15 full member states and 7 associate member states. Only full members may vote on amendments to or interpretations of the Agreement. A seller that registers under the Agreement must agree to collect tax for sales into all full member states. It may collect tax on sales into an associate member state, but is not required to do so (unless the seller is otherwise legally required to collect in that state).

As of the Dallas meeting, the full member states were Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, and West Virginia. The associate member states were Arkansas, Nevada, Ohio, Tennessee, Utah, Washington, and Wyoming. The associate member states' status is discussed below.

 —  Arkansas and Wyoming become full members on January 1, 2008, as the result of votes taken at the Board's Kansas City meeting.

 —  Nevada becomes a full member on April 1, 2008, as noted above, as a result of the vote taken in Dallas.

 —  Washington and Tennessee have enacted full conformity with the Agreement (including destination sourcing), but with delayed effective dates. They are scheduled, barring any intervening law changes, to automatically become full members when their conforming changes take effect. For Washington, that date is July 1, 2008. For Tennessee, it is July 1, 2009.

 —  Ohio and Utah have been unable to enact destination sourcing and their associate membership was scheduled to expire on December 31, 2007. However, as a result of an amendment approved in Dallas, they will continue as associate members until July 1, 2009.

As discussed further below, Ohio, Tennessee, Utah, and Washington may all seek to take advantage of the newly available election for origin sourcing. In this event, they would have to reapply for membership under the new criteria. If their membership was approved, they would be associate members for an indefinite period of time until full membership was triggered.

Sourcing Debate

The requirement to adopt destination sourcing has been the greatest impediment to conforming to the Agreement for many states. Kansas and Washington had an especially difficult time coming into conformity. Destination sourcing is now in force in Kansas and is scheduled to come into effect in Washington on July 1, 2008. Tennessee has delayed its enacted destination sourcing provisions several times in the last few years, and the provisions are now scheduled to take effect on July 1, 2009. Political pressures forced Ohio and Utah to repeal destination sourcing in those states before it came into effect.

Non-member states that currently source sales on an origin basis have said that destination sourcing requirements in the Agreement prevent them from joining. These states include Arizona, California, Illinois, Missouri, New Mexico, Texas, and Virginia. Some localities in Florida and Pennsylvania also use origin sourcing. Texas and Virginia have been particularly prominent in lobbying the Board to abandon the destination sourcing mandate. Texas Comptroller Susan Combs attended the Board meeting in Dallas to express her support for the change.

Ultimately, the full member states concluded that the Agreement must accommodate origin sourcing if the group is to grow, rather than shrink, and if it is going to convince Congress to pass mandatory collection legislation. Board President Joan Wagnon, Secretary of the Kansas Department of Revenue, said that Congress wants “uniform” sourcing, rather than destination sourcing. She added that uniform sourcing can be achieved by offering states one of two options: destination sourcing for all sales, or destination sourcing for interstate sales and a single method of origin sourcing for intrastate sales. Several proponents of the amendment argued that it represented an improvement over the current system in the states because it sets forth a uniform way in which origin sourcing must be applied.

Representatives of state and local governments from Arizona, California, Illinois, Missouri, New Mexico, Ohio, Tennessee, Texas, Utah, and Virginia spoke in favor of the amendment, saying that it resolved all, or most, of their previous objections. West Virginia Delegate John Doyle, First Vice President of the Board, put the speakers on notice that the origin sourcing states would be expected to join in lobbying Congress to pass the federal legislation in return for this amendment.

The business community was divided in its response. The board of the Business Advisory Council deadlocked 11-11 (with four abstentions) on whether to support the amendment. Speaking in favor were Wayne Zakrzewski, JCPenney; Sean Nicholson, Target; and Warren Townsend, Wal-Mart Stores. Townsend said the amendment offered the Board an opportunity to correct a mistake it had made years ago. Deborah Bierbaum, AT&T, added the amendment resolved many of her concerns, although she preferred a trigger of seven states. Charles Collins, ADP Taxware, said that his company's systems could accommodate the proposed sourcing changes.

On the other hand, Richard Prem, Amazon.com, argued that destination sourcing is preferable if states want to assure that taxpayers cannot “game” the system, and it is more transparent to consumers. Frank Julian, Macy's, noted that the Agreement was amended years ago to allow a second state rate for food to accommodate Illinois, yet Illinois has not joined. Stephen Olivier, Chevron, asked what other changes would be made to the Agreement to bring in more states. He suggested Florida and Maryland may seek changes to the rounding rule, and Connecticut and Massachusetts may want to lift the restrictions on caps and thresholds.

Similarly, Washington State Rep. Ed Orcutt argued that making this change encourages non-member states to put off enacting the conforming changes in the hope that they also can have the Agreement modified in their favor. George Phillips, Vermont Department of Taxes, said that he was “very concerned” about the equal protection implications of the fact that the same transaction could be taxed differently based on “where the sale is routed.”

Despite the various concerns expressed, the full members of the Board approved the amendment unanimously.

Origin Sourcing Requirements

Under the Agreement as amended, a state that has local jurisdictions that levy or receive sales or use tax may elect to source retail sales of tangible personal property or digital goods to the location where the order is received by the seller, rather than to the location where receipt by the purchase occurs (or is presumed to occur). This provision does not apply to over-the-counter sales or leases and rentals. The order must be received in the same state by the seller where receipt of the product by the purchaser or its donee occurs (i.e. it must be an intrastate sale). The location where receipt by the purchaser occurs is determined by the existing sourcing hierarchy in the Agreement. The seller's sales tax recordkeeping system must capture the location where the order is received to qualify.

A state making this election to source sales on an origin basis must comply with several requirements, summarized below.

 —  Interstate sales must be sourced on a destination basis.

 —  When a sale is sourced on an origin basis, no additional tax may be levied based on where the product is delivered (i.e. a purchaser does not have any additional use tax liability). A purchaser also is not entitled to any refund if the rate is lower where the product is delivered.

 —  A state cannot require a seller to use a recordkeeping system that captures the location where an order is received.

 —  A purchaser has no additional liability for tax, penalty, or interest on a sale if it remits tax to the seller on the invoiced amount, so long as that amount is calculated at either the rate where receipt by the purchaser occurs or where the order is received by the seller.

 —  The location where the order is received is defined as “an established outlet, office, location or automated order receipt system operated by or on behalf of the seller where an order is initially received” and not where the order is subsequently accepted, completed, or fulfilled. An order is received when all the information necessary for acceptance has been received. The location from which a product is shipped cannot be used in determining the location where the order is received.

 —  A state must permit direct pay permits under specified circumstances. Purchasers using direct pay must remit tax at the rate in effect where receipt of the product occurs or the product is first used, as determined by state law.

An additional requirement is that a state must elect either origin sourcing or destination sourcing for a “mixed” transaction. A mixed transaction is one in which taxable services are sold with tangible personal property or digital products pursuant to a single contract or in the same transaction, are billed on the same statement, and would be sourced to different jurisdictions absent this requirement. However, the exact wording of this requirement is going to be reexamined at the next Board meeting after objections from the business community could not be resolved prior to the vote in Dallas.

Finally, a state that elects to use origin sourcing must, upon becoming a full member state, “provide reasonable compensation for the incremental expenses incurred in establishing or maintaining a uniform origin system for administering, collection and remitting” tax on an origin basis. Business representatives objected to the vagueness of this mandate and expressed skepticism that states would actually provide compensation. In addition, they sought to require the state to provide compensation as soon as it makes the election, rather than waiting until it becomes a full member. However, a motion to that effect failed to pass the Board.

Trigger for Full Membership of Origin States

A state that is in substantial compliance will each of the provisions of the Agreement and elects to source sales on an origin basis in compliance with this new amendment may petition to become an associate member state at this time. On or after January 1, 2010, such an associate member state will automatically become a full member state once five states that are not full member states on December 31, 2007, are found to have met the requirements for sourcing sales on an origin basis under this new amendment. After that triggering event, states sourcing on an origin basis may become full members as soon as they are found to be in substantial compliance.

Representatives of business, and those of a few full member states, argued that five states are too few. Existing associate member states Ohio, Utah, and (probably) Tennessee are expected to make this election and retain origin sourcing. Cindi Holmstrom, Director of the Washington Department of Revenue, said that her state, which is also an associate member, may choose to make this election as well. If these four current associate member states successfully re-petition for membership under the new election, then it would only require the addition of one new state to trigger full membership for origin sourcing states. Opponents argued that adding one more state was too cheap a price for the Board to “compromise its principles.”

The majority of states, however, responded that the Board would lose two, and probably three, current associate member states if it did not agree to this compromise. Therefore, the trigger number was left at five states.

Other Actions

The Board voted to adopt a new definition, “ENERGY STAR Qualified Product,” for sales tax holiday purposes. It also approved three rules developed by the Compliance Review and Interpretations Committee related to (1) sourcing software term licenses and subscriptions, (2) procedures for the annual recertification of states, and (3) procedures for developing interpretive opinions.

Jeffrey Hyde, GE Capital, and Charles Collins, ADP Taxware, offered a presentation on desirable simplifications for the states' consideration. Quoting Justice Brandeis' description of the states as laboratories for democracy, Bruce Johnson, Utah State Tax Commission, suggested that states “experiment” with these simplifications now, rather than amend the Agreement to mandate several changes that might have to be revisited. Indiana State Senator Luke Kenley commented that he saw the SST effort developing “a national platform” to address issues such as those raised by Hyde and Collins. In this regard, Jerry Johnson, Oklahoma Tax Commission, said that he would like to encourage non-member states to adopt as many SST simplifications as possible. Also, he wants to ensure that all SST-registered sellers may use the simplified electronic return, not just those sellers using a certified system.

The Board received testimony on various proposed amendments and rules related to direct mail and delivery charges, but no action was taken. The issue is expected to be taken up again during the Board's next meeting.

The State and Local Advisory Council (SLAC) met the day before the Board meeting commenced, but it took no final actions. SLAC Chair Sherry Harrell, Tennessee Department of Revenue, said that, other than the outstanding issues on direct mail, the group is beginning to work on “new assignments,” including the sourcing of floral sales, the meaning of “services necessary to complete the sale” as an element in the “sales price” definition, possible definition toggles in the area of resale, and issues related to maintenance and warranty contracts.

Board Activity in 2008

Board President Wagnon said that she has three strategic goals for the Board: (1) having more states join as members, (2) encouraging more retailers to volunteer to collect, and (3) getting Congress to act on the federal SST legislation. The location of 2008 meetings is being chosen with these goals in mind. The Board's Executive Committee may meet in Florida in January or early February. The entire Board then plans to meet at a date to be set in March at a location in Virginia near to Washington, D.C. In late June or early July, a Board meeting is planned for Chicago. Then, in early September, the Board's annual meeting will be held in Charleston, West Virginia.

Streamlined Sales Tax Governing Board and State and Local Advisory Council Meetings, Dallas, December 10-12, 2007