The Streamlined Sales Tax Project and its Impact on Pennsylvania
Carolynn S. Iafrate, CPA, JD
The Streamlined Sales Tax Project was created by state governments—with input from local governments and the private sector—to simplify and modernize sales and use tax collection and administration. The effort has been under way since March 2000, when the project was organized. The effort has focused on creating uniform provisions that cover definitions, exemption administration, sourcing rules, returns and remittances, and rounding rules, all of which have been incorporated into the Streamlined Sales and Use Tax Agreement. "The impetus for the states to develop the Streamlined Sales Tax Project was the effect on tax revenues from the explosive growth in electronic commerce and the inability of states to require remote sellers to collect sales tax," says Loren Chumley, co-chair of the Streamlined Sales Tax Project's conforming states committee, and Tennessee revenue commissioner.
The agreement becomes effective when at least 10 states that comprise 20 percent of the population are found to be in compliance with the requirements of the agreement. With the approval of the Associate Member concept at the April 16, 2005, meeting of the Streamlined Sales Tax Implementing States (SSTIS), it is likely the agreement will become effective Oct. 1, 2005.
Forty-three states participate in the project, including Pennsylvania. However, Pennsylvania is not yet an implementing state, of which there were 41 as this issue went to press.1 Pennsylvania, therefore, does not have a vote among the implementing states, which acts as the current governing body and is responsible for approving amendments to the agreement. Pennsylvania can express its opinion regarding proposed amendments—as may the general public—but the state does not have a vote.
Twenty-one states have enacted conforming legislation during the last several years, producing substantial change among state sales and use tax laws. Taxpayers are seeing more uniformity from state to state, and they are seeing statutory and regulatory guidance for transactions that had not been addressed by outdated and antiquated tax policies. These changes are due in large part to the input from businesses and practitioners, as well as an understanding that business is being conducted today in a significantly different manner than in the past. These states also recognize the burden that has been placed on multistate businesses that have to collect sales tax in several states. By working to simplify and modernize sales and use tax laws, the states can ease this burden on businesses. In Pennsylvania, House Bill 92 was introduced Jan. 25, 2005, by state Rep. David Steil (R-Bucks). The proposal encourages a simplified sales and use tax system that would reduce the burden and cost for vendors to collect Pennsylvania sales and use tax. Passage of the bill would make Pennsylvania an implementing state, and give it voting rights. As this issue went to press, the bill was in the House Rules Committee.
In today's business environment, companies that transact business in only one state are extremely rare. With technology, even the local mom-and-pop shop can sell to customers all over the country. To the extent that businesses are in essence establishing nexus in jurisdictions outside Pennsylvania, the Streamlined Sales Tax Project provides them with an opportunity to come forward via the agreement's amnesty provisions. The agreement also attracts multistate taxpayers by creating uniformity in both definitions and administration provisions. Steve Kranz, tax counsel for the Council on State Taxation and leader of the Business Advisory Council, says, "Increasingly, companies are participating in the SSTP as they realize the potential it offers to influence the sales tax policy of the future."
The project is setting the sales tax policy of the future. The most substantive changes to sales and use tax laws recently have been a direct result of the project. Within the last year, for example, New Jersey has proposed conforming legislation that likely will take effect sometime this summer. This may create difficulty for some businesses if Pennsylvania does not become an implementing state.
For instance, Pennsylvania's definitions are unique to Pennsylvania, with no uniformity with other states at the moment. Thus, what's candy in Pennsylvania may not be candy, but rather food, in the 21 states that have enacted the conforming language of the agreement. This uniformity makes it easier for businesses in these 21 states to collect the appropriate tax from in-state and out-of-state customers.
Another example is the agreement's definition of alternative delivery methods of software, such as electronic delivery, and load and leave. By defining these terms, states can decide whether to tax or not tax software delivered utilizing these methods. In Pennsylvania, these alternative delivery methods are addressed only in sales and use tax rulings, and not directly in the law. Taxpayers have to go through extraneous efforts to track changes to the Commonwealth's policy on these matters.
Until some form of federal action is taken—either via Congressional action or a decision by the U.S. Supreme Court that overturns Quill v. North Dakota2—participation by businesses within the project will be voluntary. That being the case, when a business volunteers to take part, it will be required to collect tax in every state that has enacted conforming legislation and is in compliance with the agreement, regardless of whether nexus exists. If a company has nexus within a state, it is required to comply with that state's laws.
Based on Pennsylvania's current status, the state will not recognize revenue from voluntary collections. If some form of federal action is taken that mandates collection upon remote sellers under the agreement, again, Pennsylvania will not recognize revenue from mandatory collections.
The project has gained support over the past five years, and continues to move forward under the hope that Congress will enact federal legislation that addresses the Quill physical-presence nexus standard. It is important to be familiar with the effort and support Pennsylvania's future involvement to assure uniformity in each state in which Pennsylvania-based companies are doing business.
The next meeting related to the project is scheduled for June 30 to July 1 in Chicago. For more information about upcoming meetings and about the project, visit the Streamlined Sales Tax Project's Web site at www.streamlinedsalestax.org.
1 New Mexico was slated to become an implementing state effective June 17, 2005. See N.M.H.B. 575, Laws 2005.
2 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
Carolynn S. Iafrate, CPA, JD, is founder of Industry Sales Tax Solutions LLC, and is an attorney in the Philadelphia area. She can be reached at firstname.lastname@example.org.
LAST UPDATED 6/1/2005