RSM Resources

Nearly 20 states have joined an initiative to simplify and modernize sales-tax collection and administration across the country. The uniform, interstate system gives midsized companies the option to voluntarily collect and remit sales taxes on products and services they sell in member states.

Why would retailers and other sellers volunteer to be tax collectors under the Streamlined Sales Tax Project (SSTP)? One reason is that member states — eager to boost tax revenue — are offering sales-tax amnesty. They agree to absolve participating companies of their previous failures to collect and pay sales taxes, as well as interest and penalty. Participating companies, in turn, agree to collect and remit taxes for all current member states and those that join later.

Business leaders should be aware that the SSTP amnesty offer does have several key limitations, says Kristi Magill, the national managing director for RSM McGladrey’s state and local tax practice. For example, the SSTP covers only sales tax and not other liabilities such as consumer use, income or franchise tax. Efforts are under way to help resolve some of these tax issues in a coordinated manner through the Multistate Tax Commission. Any business considering SSTP amnesty should take a close look at the fine print, balance the risks and rewards with other tax-amnesty or voluntary disclosure programs, and consult a tax professional before taking any steps, Magill says.

Background on the SSTP
The streamlined sales-tax initiative took effect nationally in October 2005. It ushered in sweeping changes in how companies collect taxes.

The stated purpose of the SSTP is to streamline sales-tax collection and administration. The system employs standardized rules and definitions. Given the archaic and complicated nature of state and local sales-tax systems, this is a laudable and necessary goal — in theory. However,the spin by many government officials — that it’s a simple and positive thing for businesses and includes no cost implications — leaves many small and midsized businesses begging to differ.

Many tax experts believe that the real purpose of the agreement is not only simplifying tax collection but increasing state coffers by collecting taxes through out-of-state mail-order and online sellers. However, the agreement has affected businesses far beyond those that the project targets. The SSTP enables participating states to levy taxes on sales by nonresident companies,provided they can entice those out-of-state companies to volunteer for the program.

To date, the program has 13 full-member states and six associate-member states. Full members have brought their respective sales-tax laws into compliance with SSTP principles. Associate members are still making progress toward conformity.

Origin- vs. destination-based sales taxes
As the streamlined tax initiative gets under way, smaller businesses have noted several key challenges. One of the biggest issues — and one that often divides large companies from smaller businesses — is the change from an "origin-based" to a "destination-based" sales-tax collection model. This provision applies at both the state and local levels, and it has created a new collection burden on many smaller companies whose sales are mostly in-state.

For example, under the old origin-based model, a pizza parlor that made deliveries to many different suburbs may have collected just one sales tax — the one for its location. Under the destination-based sales-tax model, this pizza parlor must now know and collect the sales tax due where it delivers each pizza.

State-provided tools still unavailable
Small and midsized businesses also are struggling to comply with the SSTP provisions because they lack the sales-tax administrative outsourcing and software capabilities the project promised. Member states had agreed to provide certified service providers or system software to participating businesses, but they still are developing these tools. In addition, recent recommendations from the project call for providing this assistance only to companies that do not have nexus, which could be a big blow to companies expecting some help to defray the costs of SSTP administration. Under current proposals, intrastate businesses will not qualify for assistance. Interstate businesses will not qualify for assistance in states where they have nexus, which can be triggered by as little as sales representatives soliciting within state borders. Resolution of this issue is critical for the project and is a significant focus for both government and businesses.

Mandatory compliance may be coming
The days could be numbered for the voluntary nature of the Streamlined Sales Tax Project. Pending legislation in both the U.S. House and Senate (H.R. 3184 and S. 1736) would make the agreement mandatory. Companies should be prepared for change regardless. If the national legislation passes, it would give states authority to collect taxes from remote sellers that have no physical presence within their boundaries. In other words, businesses that have not voluntarily registered for the uniform system could be compelled to do so. Even without national legislation, legislative changes at the state level could affect how many businesses must administer sales-tax collection.