Foreign corporations that have US subsidiaries selling tangible personal property within the US may be familiar with the concept that the commerce clause of the US Constitution, which serves to limit state action to the extent that it burdens national commerce, prohibits a state from requiring sellers who have no physical presence or a de minimus presence within the state (known as remote sellers) to collect sales tax on purchases of goods shipped to in-state customers.
This commerce clause prohibition enables customers to buy goods over the internet or by catalogue on a so-called tax-free basis. In fact, these purchases are not tax free - states impose a legal obligation upon buyers to self-assess and remit state sales tax on goods they purchase when the seller has not previously collected tax. But because individuals either are unaware of this responsibility or choose to ignore it, and because state revenue departments lack the resources to audit and assess sales tax at the individual consumer level, a significant class of sales made by remote sellers escapes taxation.
In an effort to recover such uncollectible tax revenue, states have banded together in an attempt to simplify their sales tax systems with the hopes that this will encourage remote sellers to voluntarily begin collecting tax on a prospective basis, and persuade the US Congress to pass legislation enabling states to require remote sellers to collect tax on sales made to customers in their state. This effort is called the streamlined sales tax project (SSTP).
Since 2000, the SSTP has been working towards the following goals: uniform definitions; tax rate simplification; state-level administration of all local sales taxes; uniform sourcing rules; simplified administration of tax exemptions; uniform audit procedures; and state funding of the system. Members of state revenue departments have made up a large portion of the SSTP participants. To date, 38 states and the District of Columbia are voting members of the SSTP. Two states are non-voting project participants because they have not received official state authority to participate.
In late 2002 the SSTP approved the streamlined sales and use tax agreement (the Agreement), which embodies these goals. In order to achieve simplification, states must enact legislation that makes their sales tax laws conform to the provisions of the Agreement (conforming legislation). To date, 20 states have enacted conforming legislation.
The Agreement becomes effective when 10 states representing at least 20% of the US population have enacted conforming legislation, their conformity with the Agreement has been certified, and certain administrative matters have been completed. SSTP voting participants are in the process of certifying whether each state's conforming legislation actually satisfies the uniformity provisions set out in the Agreement.
The Agreement could be effective as early as July 1 2004, although most observers believe it will be January 1 2005 before all necessary actions are completed.
When the Agreement becomes effective between the states that have adopted conforming legislation, all retailers should be aware that big changes with respect to the states' sales tax definitions and tax rates, among other things, will be carried out immediately.
Amnesty offered
Remote sellers should also be aware that the Agreement affords them an opportunity for total amnesty for liability for prior non-collection if they voluntarily agree to begin collecting tax on their sales, provided that they have not previously been notified by the state that they have been selected for audit.
This amnesty offers a valuable opportunity for remote sellers who may have employees or independent contractors engaging in activities in the state on their behalf, thereby triggering sales tax liability for uncollected tax. Additionally, many states are willing to enter into amnesty agreements with remote sellers that have a limited in-state presence even though the Agreement is not yet in effect.
Remote sellers are encouraged to seek out such amnesty immediately, rather than wait until the Agreement is effective, to avoid the risk of being contacted by a state in the meantime, which would eliminate the availability of amnesty.
Because of the great speed at which states have enacted conforming legislation, two pieces of legislation that would mandate state tax collection in light of the sales tax simplification efforts were introduced to the US Congress in late 2003. Remote sellers who do not agree to voluntarily tax collection under the Agreement should carefully monitor this legislation. If either of the Bills is enacted, remote sellers will no longer have a choice regarding state sales tax collection.
Beth Anne Stanford (bastanford@alston.com), John L Coalson (jcoalson@alston.com), and Michael T Petrik (mpetrik@alston.com) Atlanta
