Thanks to the shaky economy and the fact that many states face budget shortfalls this year, some experts think the streamlined sales tax movement may gain some ground in 2009. The issue, a perennial favorite for cash-strapped governors and state legislators, might find a friendlier Congress than in previous years.

The streamlined sales tax, also known as the streamlined sales and use tax agreement, is an effort by some states — including North Carolina — to enforce already existing sales taxes on online transactions.

Proponents of the Streamlined Sales Tax Project, or SSTP, hope to get authorization for states to force online businesses to collect sales tax from out-of-state customers. Even when the online businesses do not have a physical presence, or nexus, in the states, the companies still would be forced to remit the taxes to the states that customers listed as their place of residence.

Proponents of the SSTP include about 23 states, the majority of which are considered full-member states, according to the project’s Web site. These states are in full compliance with the Streamlined Sales and Use Tax Agreement as decided by the SSTP’s Governing Board, said Scott Peterson, executive director of the board.

States expecting a jackpot

The project’s primary purpose is to simplify and enforce rules already in effect and to collect money already owed by consumers, Peterson said. The upshots include what Peterson estimates to be $15 billion to $20 billion in revenue for states and a chance to level the playing field for brick-and-mortar stores.

“This is all about tax administration. This is about making the current, existing sales tax system more equitable, more fair and less expensive for the retailers that collect the tax,” Peterson said. Brick-and-mortar stores say they are at a competitive disadvantage to online stores, which do not have to collect and remit such taxes. Instead, consumers are expected to report all Internet purchases in their yearly taxes.

But Peterson and other proponents of the tax project know not to hold their breath while waiting for the check to come. Consumers, when asked to pay taxes with no tangible consequences for not doing so, simply don’t do it.

“Our point has always been that there are people out there that have a tax obligation that they are evading. This is consumer tax evasion,” Peterson said, classifying the guilty as either “ignorant” or “criminal.” “We’re not trying to hide the fact that there is a consumer that is going to pay the tax that they may or may not pay today.”

States’ ‘elaborate scheme’ to tax

If it sounds fair, critics say think again. The streamlined sales tax allows politicians to raise taxes under the guise of not doing so, by avoiding the need to pass any new legislation. That could be bad news for today’s battered consumer, says Jim Harper, director of information policy studies for the Cato Institute. Harper’s area of expertise is adapting law and policy to the Internet.

“You’re talking about an elaborate scheme to try to avoid responsibility for taxation,” he said. Despite claims that the economy is to blame for tearing their budgets asunder, the “states have been profligate spenders, and that’s where the real budget shortfalls come from,” he said.

The sales tax raises questions that go beyond figuring out ways to enforce an unenforceable law. Charges abound that the implementation of a streamlined sales tax would infringe on states’ rights, endow the states with too much power to tax, place unfair burdens on Internet business, and quickly become cost-prohibitive.

“The idea of streamlining state sales tax is still just a fantasy. They talk about it, they talk about how they can do it, (that) there’s all kinds of models for rationalizing state tax nationwide. But they don’t have the model for it,” Harper said.

SSTP ready to go

Adherents of the Streamlined Sales Tax Project, on the other hand, say that it is ready for implementation, with computer programs written and already functioning that allow for the country’s more than 7,500 state and local tax jurisdictions to adopt a uniform system. For example, these programs know when to classify the purchase of a bag of cotton candy from CottonCandyLover.com as “recreation” in one state and as “food” in another, both taxed at different rates.

“Frankly, this software has been available long before there has been a streamlined sales tax,” said Peterson, who has been working on the tax for nearly 25 years. Every member state of the project has to create a database of its rates, broken down by jurisdiction and a nine-digit zip code, he said.

But even Peterson recognized implementation issues: “One of the problems we have, the reason our stuff isn’t widely used, is because (business owners) out there don’t create businesses thinking about their sale tax obligation.”

The cost of converting the sales tax system in every existing business to the SSTP-compliant version is high, even by Peterson’s own standards. That cost would be passed on to the state. For example, if a company does 3 percent of its business in North Carolina and 97 percent in Tennessee, the cost of implementing the new system also would be divvied up that way, with Tennessee paying 97 percent of the fee.

“We know (it’s expensive),” Peterson said. “But we also acknowledge that it’s the states’ laws that create that expense (in the first place).”

Electronic retailers oppose SSTP

Even with a fully paid-for, streamlined system in place, online retailers would be facing new encumbrances to conducting business as usual, said Bill McClellan, vice president of government affairs for the Electronic Retailing Association, the trade association for direct response marketers.

A nationally focused, electronic retailer would be forced to collect taxes in more than 7,500 jurisdictions — not just in one, like the brick-and-mortar shops do.

“Basically what the states want us to do is go and be their tax collector. They’re the ones who have both the ability and legal responsibility to collect that from the people who live in the state,” McClellan said. “No state wants to go out there and say, ‘Oh, we’ve got to come in and collect taxes from you. They prefer to do it on the business side of things, instead of (from) individuals as the law requires.”

The amount of uncollected taxes isn’t nearly as high as Peterson and the tax supporters estimate, either, he said. Out of the top 500 Internet retailers in terms of sales, most of the revenue generation comes from stores, such as Macys.com or BananaRepublic.com, that already have a nexus in a state and are therefore already paying taxes. “Once you whittle (away the stores) already collecting taxes, the number is much, much smaller,” he said of the uncollected revenue.

‘Big push’ this year for SSTP

Though Harper thinks the streamlined sales tax is dead in the water, both McClellan and Peterson think that this could be the year for real movement on the issue.

“We expect there to be a big push this year,” McClellan said. “We’re here, ready to make the arguments on our side. (They’re) pretty convincing for any person who is open-minded about the reality of what we’re being asked to do.”

He added that there is a coalition of critics in Washington, D.C. that has been the “mitigating factor” in the streamlined sales tax debates in recent years.
“We’re not sure how the new political landscape is going to play out in terms of what the composition of Congress is,” he said, noting that the opponents have received support from Democrats and Republicans.

Peterson’s side is raising its army, too. He said that the project has received indications of support from several more members of Congress than it has in the past, and from new states that are not currently included in the SSTP.

Tax proponents expect Sen. Michael Enzi, D-Wyo., and Rep. William Delahunt, D-Mass., to reintroduce their respective legislation in favor of the sales tax this year, and to plan to continue to recruit support in both houses.

Colleen Calvani is a contributor to Carolina Journal.