The feature is currently being tested in several of Drizly’s markets. It is expected to launch early next year.
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To get widespread participation among retailers, state officials have long sought a federal mandate, only to be set back by the U.S. Supreme Court. In the 1990s, the Court re-affirmed a 1960s’ ruling that states could not force collection of sales tax in any state where a remote business had no physical presence, or nexus. The Court decided that mandating collection of sales tax imposed an unfair burden on remote retailers and other businesses. This left states with two options: persuade retailers like Williams-Sonoma to voluntary collect tax or get Congress to pass a new law that would withstand any court challenges. Either way, they realized they’d first have to provide for a simpler way to collect tax.
Several developments have recently begun to swing the online sales tax issue in their favor, and it now appears possible that a federally mandated multi-state online sales tax collection system could be in place next year, if not later this year, several state officials and independent analysts say.
The most important of these developments is the work of the Streamlined Sales Tax Project. Formed by 34 states and the District of Columbia, the SSTP is working to simplify and bring more uniformity to the way states levy and define sales tax, in effect, making it easier for remote, direct-to-consumer merchants to collect sales tax in multiple states.
The SSTP, an outgrowth of the National Governors Association, the Multistate Tax Commission and the Federal Tax Administrators, is developing a sales tax simplification and uniformity plan under which states would agree to levy a single in-state general sales tax for all but exempted products such as food and drugs, which would carry a separate rate or no rate at all, depending on the state. Under current systems, some states impose several sales tax rates for a general range of products and services. Under the SSTP rules, states would still set their own rates, only fewer of them. “The agreement is not about telling states what they can set their rates at,” says Sherry S. Harrell, tax administrator of the Tennessee Department of Revenue and a coordinating member of the SSTP.
In addition, states participating in the project must agree on a common definition of products that are exempted from the general state sales tax rate and taxed under an alternate rate. “You can make any product exempt, as long as you’re using an agreed-upon definition of that product,” Harrell adds.
For example, if a state wanted to exempt apparel from its general sales tax rate, it would have to use an agreed-upon definition of apparel, which could state whether apparel includes accessories such as belts and shoes.
The SSTP is also working out variations in the way different states impose sales tax on bundled products. A retailer that sells a gift package that includes cheese, a knife and a cutting board, for example, might have to collect tax on only the cutting board sold to a customer in one state but on all three pieces sold to a customer in another state. The issue can be particularly troublesome for retailers who bundle services with products, because some states tax both services and products while others tax only products.
The SSTP has also been working on making sure that retailers have reliable software systems to help make tax collection less daunting. It’s developing a system under which retailers could use state-certified and pre-audited software systems, either through an outside service or installed on their own servers, to collect taxes from multiple states. This is considered a crucial element of the project, because there are more than 7,000 local taxing jurisdictions that impose tax in addition to states. If retailers use a state-certified service or installed software, they would not be subject to an end-of-year audit of their tax-collection records, says Diane Hardt, Wisconsin sales tax administrator and co-chair of the SSTP with Peterson.
After looking at numerous tax collection software systems, the SSTP has approved four vendors: GovOne Solutions LP’s Taxware International, a separate partnership of Taxware and Hewlett-Packard Co., a partnership of Pitney Bowes Inc. and Vertex Software Corp., and esalestax.com Inc., a unit of tax and legal publisher CCH Inc.
The 10/20 goal
To make its final plan more palatable to both the federal government and retailers, the SSTP is committed to getting approval from at least 10 states whose combined populations will equal at least 20% of the population of all states that impose sales tax. By having that critical mass, SSTP officials say, they figure they’ll present retailers with enough states and consumers to make their tax-collection efforts worthwhile. “It will make sense for retailers when there are enough people in participating states to make a retailer want to participate in the tax collection plan,” says Frank Shafroth, director of state and federal relations for the National Governors Association.
After nearly three years of working out details, the project is nearly completed and SSTP officials say they’ll have no problem meeting their 10-state/20% threshold. As of mid-March, there were 32 SSTP member sates working on legislation to approve the SSTP’s plan for sales tax simplification and uniformity. “By this summer, we’ll have 15 states that have enacted their legislation, so by the end of 2003 we’ll be ready to go,” Hardt says. She adds that it’s even possible Congress could approve the project this year, though she admits that may be unlikely because Congress appears inclined to insist on having at least 20 states participating.
Once Congress approves the project, it’s expected to enact a law granting the participating states the authority to require retailers to collect tax on all online sales, regardless of whether they maintain a physical presence in a shopper’s home state. In effect, that would change what has been the status quo since the Supreme Court’s 1960s’ ruling.
Some retailers have opted to get on board with the tax-collection project ahead of any federal action. That’s where the Wal-Mart and Target deal came from. A Wal-Mart spokeswoman admits that increasing integration between WalMart.com and Wal-Mart Stores made the retailer realize that it could not avoid the tax-collection issue.