Streamlined Sales and Use Tax Project

The Streamlined Sales and Use Tax Project (SSTP) is a multi-state project created to simplify and modernize sales and use tax administration in member states in order to reduce the burden of tax compliance and collect sales taxes due from interstate transactions. The United States Constitution prohibits states from regulating interstate commerce. There are two exceptions, if Congress grants authority and state regulation of interstate shipments of fruits and vegetables to prevent disease and pest migration.

As a result of several U.S. Supreme Court decisions with the latest one being Quill Corporation vs. North Dakota decided May 26, 1992, the Court ruled that states may only burden sellers to collect the sales tax for them if they have a physical presence or refereed to as nexus in the state. Quill Corporation was a mail order company out of Delaware that only shipped product by common carrier. The Court overturned the North Dakota Supreme Court’s ruling, stating that mailing catalogs and not having sales representatives in the state and shipping product via common carrier did not constitute nexus in North Dakota. Ohio like most states have a use tax, which means the purchaser is liable for the tax. Click Link to Quill Decision

With the onset of the Internet states became nervous that millions of dollars in sales tax would not be collected from interstate E-commerce. Additionally, traditional vendors became concerned that E-commerce vendors had a competitive price advantage. Along with these concerns were problems and challenges multi-state vendors who have nexus in multiple states were having collecting sales taxes. Examples of challenges for business included many different definitions of taxable products, exemptions, lack of uniformity in state and local tax bases, complicated multi-layer tax structure in some states, cumbersome remittance forms, having to remit in some states to multiple jurisdictions and so on.

In the late nineties a group of states along with the business community came together to put forth a voluntary effort to simplify and streamline sales tax laws between states. This effort was a daunting task, because of the many differences between states for administrating their sales tax code. Over the years participating states had to agree to changes in the project and also had to change the laws in their states.  From the beginning Ohio was the dominant leader in this effort.

Many hurdles were overcome and on November 2, 2002 the Streamline Sales and Use Tax Agreement was adopted by what was called the implementing states, which consisted of roughly 40 states. The greatest hurdle for some states was the requirement to change how they “sourced” their sales. States where this was a major problem are states that have multiple or local sales tax rates and the sales tax rate is determined at the point of the sale, commonly referred to as origin sourcing. The SSTP requires states to change to destination sourcing, meaning the sales tax is determined where the purchaser takes possession. Therefore, products delivered are tax at that jurisdiction where the delivery is made too. As a result in states like Ohio, two problems occur; revenue shifting between taxing jurisdictions and burdensome tax compliance collecting for the sellers.

Since 2003 Senator Amstutz and I have worked diligently to change the requirement for sellers to use destination sourcing for intrastate sales. (within state) In 2004 we were successful in amending the agreement to allow for states to delay the sourcing change until January 1, 2008. However, our Governor insisted that Ohio phase in businesses to change before 2008.  A compromise was reached and businesses with over $30 million of taxable delivered sales were required to change on May 1, 2006. On May 1, 2007 sellers with taxable delivered sales over $5 million are required to change and every seller by 2008.

On October 1, 2005 the Governing Board of the SSTP became into existence. The Board consist of 13 states that are in full compliance with the agreement and 6 states that are considered associate members because their laws allow them to be fully compliant by January 1, 2008.

One aspect of the agreement was that the Governing Board would provide for providers and or compensation to sellers to help them collect the sales tax. For may sellers there are considerable costs to implement the change to destination sourcing and higher ongoing costs for this collection method. However, the Governing Board has decided that they will only provide services for “voluntary sellers,” that means sellers who have nexus are on their own. For Ohio this creates a major problem because sellers delivering product within the state all have nexus and will not be compensated or provided services from the Governing Board. Voluntary sellers only means vendors selling products between states that are not required to collect sales taxes because they do not have nexus.

Because of this change in direction Ohio submitted an amendment in April 2006 that would allow for states to determine their sourcing requirements within their state. If they chose to use origin sourcing they would be required to provide for out of state sellers a single uniform rate for the state.  Our amendment was soundly defeated by the 13 Governing Board States. Consequently, we were successful to amend Ohio law to repeal the May 1, 2007 deadline for some businesses to have to change to destination sourcing.

In conclusion, the SSTP has made some positive steps especially for multi-state sellers with nexus to relieve them of some burdensome compliance requirements. It is the hope of the SSTP to have enough states in full compliance that will encourage Congress to pass enabling legislation that would require all sellers do business in SSTP states to collect sales taxes regardless of nexus.

When this project was conceived the fear was by states that significant tax revenue would not be collected because of E-commerce. Obviously, E-commerce has grown expeditiously. However, something else is happening that was not anticipated, the growth of what is referred to has the “multi-channel retailer” has also grown enormously. This means that the traditional “bricks and mortar” retailer is also using E-commerce. Consumers have driven this growth because they want the option of shopping both online and at traditional retail outlets. Therefore, the anticipated tax revenue loss is less because a majority of E-commerce sales taxes are collected as a result of nexus.

Myself and others are concluding that smaller less populated states like the Dakotas will benefit more than larger states, for the simple fact that larger states have more retailers that sell interstate and have nexus in their states. Additionally, remote rural states many of their residents have a much more limited access to traditional retail outlets and the internet provides them a viable alternative.

In this biennium budget the administration budgeted for a net gain of $25 million from new collections as a result of SSTP. However, the result has been a $50 million dollar loss due from changing our tax law collection methods to comply with the agreement and only $400,000 per year as resulted from new volunteer sellers registration. As I stated earlier Ohio still is collecting significant E-commerce sales tax because of nexus. We will be watching Michigan and New Jersey because these states are full Governing Board states and are similar to Ohio to see if they realize significant new tax revenue from the SSTP.