DISCUSSION DRAFT
The Political Economy of the Streamlined Sales and Use Tax Agreement
John Swain
James E. Rogers College of Law
University of Arizona
Tucson, AZ
Walter Hellerstein
University of Georgia Law School
Athens, GA
I. Introduction
The sales tax streamlining movement may well be the most significant
development in state sales taxation since the genesis of the state sales tax in the 1930s as
“a desperation measure” to make up for plummeting income and property tax revenues.1
Though states have increasingly relied on the sales tax as a major (if not the most
important) source of revenue,2 the structural flaws in the tax—present since its
inception—are increasingly highlighted by an ever expanding global, service-oriented,
and digital economy. Preeminent among these flaws, at least from the standpoint of
constitutional law, had been the complexity of compliance with a multiplicity of non-

The authors wish to thank Harley Duncan, Executive Director, Federation of Tax Administrators,
and Stephen Kranz, Tax Counsel, Council on State Taxation, for providing valuable background
information and insights regarding the sales tax streamlining movement. All errors or omissions are our
own.
1
J. DUE & J. MIKESELL, SALES TAXATION: STATE AND LOCAL STRUCTURE AND ADMINISTRATION
1 (2d ed. 1994).
2
The general sales tax vies with the personal income tax as the leading source of state tax revenue.
It was the leading source of state tax revenue during the mid–1990s, fell to second place during the
booming economy of the late 1990s, and was in a virtual dead heat with the personal income tax in 2004.
See JEROME R. HELLERSTEIN & WALTER HELLERSTEIN, STATE AND LOCAL TAXATION 3 (8th ed. 2005). In
2004, the state sales tax yielded $194.2 billion, or 33.4 percent of the total of state revenues. U.S. Census
Bureau, National Totals of State Tax Revenue by Type of Tax, available at
http://www.census.gov/govs/qtax/table2.txt. The figures are for the twelve-month period ending June 2004.
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uniform state and local sales tax regimes. This shortcoming has prompted the U.S.
Supreme Court to hold on two separate occasions that the tax is an unconstitutional
burden on interstate commerce as applied to sellers without an in-state physical presence
(hereinafter sometimes referred to as “remote sellers”).3
Though the de facto exemption for remote sellers was a major thorn in the side of
state tax authorities (and non-remote retailers) for at least the past four decades, states
showed little if any willingness to adopt more uniform rules until the Internet exploded
onto the scene. While investors were seized by a frenzy of optimism over the potential
for electronic commerce and Internet retailing, state tax authorities and brick and mortar
retailers saw a surge in remote selling as an imminent and possibly mortal threat. History
teaches us that crises, however dangerous, are moments of great opportunity.4 The
streamlining movement bears witness to this truism, as we explain in greater detail
below.
This paper has four major objectives. The first is to identify the tax policy
underpinnings of streamlining as well as the political and economic forces that spawned
the initial streamlining movement. The second is to describe the antecedents to
streamlining, the Streamlined Sales Tax Project (SSTP), and the agreement that the SSTP
produced (the Streamlined Sales and Use Tax Agreement or SSUTA). The third is to
3
National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967) (holding that both
the Due Process Clause and Commerce Clause require that a remote seller be physically present in order for
a state to impose a use tax collection obligation); Quill Corp. v. North Dakota, 504 U.S. 298 (affirming the
Bellas Hess Commerce Clause holding but finding that there is no due process bar to imposing a use tax
collection obligation on remote sellers that purposefully avail themselves of benefits provided by the state).
4
It is also said that the Chinese character for crisis constitutes a combination of the characters for
danger and opportunity. See, e.g., LaShawn A. v. Kelly, 887 F. Supp. 297, 317 (D.D.C. 1995) (“At the
time of the Cuban missile crisis, President John F. Kennedy noted that the Chinese character for crisis is a
composite of two other characters meaning ‘danger’ and ‘opportunity.’”). Whether or not this proposition
is true from a linguistic standpoint, see “Myths About the Chinese Language,”available at
www.webcom.com/~bamboo/chinese/myths.html, it retains its force as a valuable insight.
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examine how political and economic forces have shaped, and continue to shape, the
streamlining movement. The fourth is to explore whether and how streamlining, or the
lessons learned from streamlining, might serve as a platform or template for more
fundamental sales tax reform. Because the SSTP is still a work in progress, some of the
discussion in this paper must necessarily be regarded as preliminary. Nevertheless,
because of the enormous potential significance of the SSTP, we welcome the opportunity
to undertake a general—if somewhat tentative—exploration of the political economy of
streamlining.
II. The Flaws in the Existing Retail Sales Tax and the Impetus to Reform
Most experts agree that a normative tax system should be equitable, economically
efficient, and administrable, although there may be variations on the precise way in
which these goals are formulated.5 The existing retail sales tax falls far short of each of
these normative goals. The levy offends both equity and efficiency criteria by its
overinclusiveness in taxing many business purchases and its underinclusiveness in
excluding housing, intangible property, and services. The inclusion of business
purchases causes the effective tax rate on household consumption to pyramid, and
because different products and production methods have varying levels of taxable inputs,
effective tax rates on household consumption vary arbitrarily (inequitably) and distort
consumer decision-making. Similarly, the general failure to include services, housing,
and intangibles within the sales tax base arbitrarily favors these forms of consumption.
5
See, e.g., RICHARD W. TRESCH, PUBLIC FINANCE: A NORMATIVE THEORY 332-33 (2d ed. 2002);
JOHN L. MIKESELL, FISCAL ADMINISTRATION: ANALYSIS AND APPLICATIONS FOR THE PUBLIC SECTOR 278
(4th ed. 1995).
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The existing system also offends the goal of administrability. The existence of 46
independent state-level taxing regimes, along with more than 7,500 local taxing
jurisdictions, has created a patchwork of rules of substantive tax liability6 and tax
administration that can make compliance a nightmare for the multistate vendor. The U.S.
Supreme Court has reacted to this quagmire of different and often-conflicting state and
local tax rules by articulating and reaffirming a nexus rule that relieves out-of-state
vendors of use tax collection responsibilities in states in which they lack a physical
presence.7 As a consequence, sales by remote vendors enjoy a de facto immunity from
taxation, even though such purchases are frequently subject to use tax, because
nonbusiness purchasers rarely remit the tax for which they are liable. Thus, the Court’s
remedy for the sale tax’s administrative shortcomings has rendered the tax even more
inequitable and distortive by giving out-of-state merchants a competitive advantage over
local merchants.
These structural flaws are highlighted and exacerbated by secular economic
trends. Indeed, the retail sales tax in its current form is peculiarly unsuited to an
increasingly service-oriented, digital, and borderless economy. As students of tax reform
well know, however, the recognition from a normative perspective that a tax is wanting
6
If the states were to transform their sales taxes into true consumption taxes in which all business
purchases were exempt and all household purchases for personal consumption (whether of goods or
services) were taxable, we would have gone a long way toward creating a simple and uniform sales tax that
could be administered in a multistate environment with minimal burdens for interstate vendors. See
generally Charles E. McLure, Jr., Radical Reform of the State Sales and Use Tax: Achieving Simplicity,
Economic Neutrality, and Fairness, 13 HARV. J.L. & TECH. 567 (2000). To determine whether a
transaction was taxable, a vendor would need to know only whether the purchase was for personal
consumption or for business purposes. To be sure, there still could be issues with respect to identifying
purchases for business use as distinguished from personal use and determining the proper “destination”
state in connection with the sale of digital products for personal consumption. Nevertheless, these
problems would pale by comparison to those that vendors confront under the existing sales and use tax
system. Moreover, states could deal with these issues by adopting standard conventions for identifying
business purchasers and for sourcing sales of digital products.
7
Bellas Hess, 386 U.S. 752; Quill, 504 U.S. 298.
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does not, by itself, create the political will necessary for successful reform. For example,
legislation that would overrule the physical presence test, subject to de minimis
exclusions and limited simplification requirements, has been introduced from time to
time,8 only to flounder. This proposed legislation, however, sought neither to address the
issue of sales tax complexity in a serious way nor to reform the sales tax base. Similarly,
modern experience with broad-based efforts to expand the sales tax to services provides
little basis for thinking that the public is ready for radical reform of the sales tax base, as
sensible as such reform may be.9 Before drawing too firm a conclusion from these
efforts, however, it is worth noting that the Florida and Massachusetts “experiments”
with expanding the sales tax base to services did not embody all the fundamental reforms
described above, because they failed to exempt business services from the tax. In fact,
that theoretical flaw may have led to their political failure because it created broad
opposition, especially from the advertising industry.
What, then, has given rise to streamlining and has driven its success to date?10
First, there are the state failures to remedy the inequities of the de facto exemption for
remote sales without embracing broader reform. In Quill Corp. v. North Dakota, 11 the
states were unsuccessful in persuading the Supreme Court to abandon the physical
presence test. More recently, states have been unable to persuade Congress to impose
more equitable state tax jurisdictional rules despite the Quill Court’s suggestion that
8
See, e.g., Interstate Sales Tax Collection Act of 1987, H.R. 1242, 100 th Cong., 1st Sess. (1987);
Equity in Interstate Competition Act of 1987, H.R. 3521, 100th Cong., 1st Sess. (1987).
9
Samuel B. Bruskin & Kathleen K. Parker, State Sales Taxes on Services: Massachusetts as a
Case Study, 45 TAX LAW. 49 (1991); Walter Hellerstein, Florida‘s Sales Tax on Services, 41 NAT’L TAX J.
1 (1988).
10
As discussed in Part V, the ultimate success of streamlining is far from certain. Moreover, as
we suggest in Part VI, whether streamlining is an example of “successful” tax reform will be debated even
if it is achieves its admittedly limited objectives.
11
504 U.S. 298 (1992).
5
DISCUSSION DRAFT
Congress take the lead on this issue. To the contrary, Congress’s only significant foray
into this arena has been to perpetuate existing inequities by adopting (and subsequently
extending) the Internet Tax Freedom Act, which, very generally, exempts Internet access
from state sales taxes and freezes existing nexus rules with respect to Internet retailing.12
These failures caused the states to “go back to the drawing board” and acknowledge,
however grudgingly, the complexity of the present system and the burden that the system
imposes on vendors and state tax administrators. More fundamental reform evidently
was needed either to (a) build a broader and more successful political coalition and/or (b)
convince Congress or the Supreme Court that the factual underpinnings purportedly
justifying the physical presence test had been removed.
It is doubtful, however, that this recognition would have motivated a sustained
reform effort had the states not also been acutely aware of the threat that the growth of
electronic commerce, coupled with the de facto exemption for remote sales, posed to the
future of the sales tax. This second driving force—electronic commerce—also served to
build a broader coalition for reform. Although brick and mortar retailers have always
been troubled by the de facto exemption allowed to their mail- (phone- and fax-) order
competitors, this concern now appeared to be dwarfed by the perceived (if ultimately
overblown) threat posed by the Internet’s promise of virtual shopping for nearly every
consumer purchase. Further, it is reasonable to speculate that both brick-and-mortar
retailers and the broader business community, having observed the urgency of the states,
12
Pub. L. No. 105-277, Title XI, 112 Stat. 2681 (1998).
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DISCUSSION DRAFT
insisted on sales tax simplification as a quid pro quo for relaxing nexus rules as matter of
negotiating instinct.13
Third, the states have come to believe that the increased availability of modern
technology may permit them to assist or cooperate with retail merchants in administering
a simplified sales tax. If, for example, states could develop or endorse tax compliance
software on which retailers could rely, the result could be expanded voluntary
compliance and, perhaps, congressional or judicial relaxation of the constitutional rules
that now prohibit them from requiring remote sellers to collect use taxes on interstate
sales. Indeed, as we discuss in greater detail in Part IV, SSUTA addresses sales tax
complexity by both adopting simplifications and creating and endorsing compliance
software designed to tackle complexity head-on.
III. Antecedents to the Streamlining Movement: Groping for Consensus
As noted above, the origins of the SSTP lie in the intense and widespread interest
in state taxation of electronic commerce that preoccupied the state tax field during the
late 1990s.14 The advent of electronic commerce raised a number of questions as to
13
A time-honored negotiating strategy is that if the other side asks for something, always ask for
something in return, even if the other side is asking for something you want too. As will be discussed
below, this is even more evident in the business community’s request for “bright-line” nexus rules for state
business activity taxes. Even though streamlining is good for business in its own right, concessions are
being asked for in other areas.
14
See, e.g., Walter Hellerstein, Deconstructing the Debate Over State Taxation of Electronic
Commerce, 13 HARV. J.L. & TECH. 549 (2000); Walter Hellerstein, Federal Constitutional Limitations on
Congressional Power to Legislate Regarding State Taxation of Electronic Commerce, 53 NAT’L TAX J.
1307 (2000); Walter Hellerstein, Internet Tax Freedom Act Limits States’ Power to Tax Internet Access and
Electronic Commerce, 90 J. TAX’N 5 (1999); Walter Hellerstein, State and Local Taxation of Electronic
Commerce: Reflections on the Emerging Issues, 52 MIAMI L. REV. 691 (1998); Walter Hellerstein, State
Taxation of Electronic Commerce, 52 TAX L. REV. 425 (1997); Kendall Houghton & Walter Hellerstein,
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whether and how state and local taxes, particularly sales and use taxes, should be applied
to such commerce. Among those concerns was that the complexity within and
inconsistency among state and local sales tax regimes limited the ability of these regimes
to accommodate the world of electronic commerce. Although this was not a novel
concern to state taxpayers and state tax administrators, because it resembled those caused
by traditional mail-order sales, the concern was exacerbated in the context of electronic
commerce because of the expectation that more vendors than ever before would be
selling more products (digital and nondigital) into more states with less contact and less
familiarity with the states and their tax systems. Consequently, the need for
simplification of the state and local sales and use tax system was apparent if it was to be
a viable mechanism for raising revenue from electronic commerce.
A. The National Tax Association’s Communications and Electronic Commerce
Tax Project
It was in the context of the growing interest in and concern over the questions
described above that the National Tax Association (NTA)15 in early 1997 formally
convened the National Tax Association’s Communications and Electronic Commerce
Tax Project (the NTA Project or the Project). The NTA Project brought together
representatives of the business community, state and local governments, and academia
who shared an interest in identifying possible solutions to the state and local tax issues
State Taxation of Electronic Commerce: Perspectives on Proposals for Change and Their Constitutionality,
2000 BYU L. REV. 9. The ensuing discussion draws freely from the last cited article.
15
The NTA, with a broad-based membership from business, government, and academia, has a
long and distinguished history as a forum for the discussion and evaluation of tax policy.
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raised by electronic commerce.16 It was widely believed that if agreement could be
reached, it would involve a combination of simplification and an expanded duty to
collect use tax.
After more than two years of work, however, the NTA Project was unable to
reach a comprehensive agreement that satisfied the concerns of both government and
business representatives on the set of issues it explored.17 Nevertheless, in a broad and
informal sense, consensus began to form around several key matters that carried over to
the subsequent work of the SSTP.18 Specifically:

Sales and Use Tax Rates. The Project generally acknowledged that the
multiplicity of tax rates imposes significant administrative burdens on
multistate sellers, particularly smaller sellers whose ability to sell nationally
and internationally has been enhanced by the advent of electronic commerce.
Accordingly, there was broad recognition of the desirability of limiting state
and local sales and use tax rates to one tax rate per state, which would apply to
all commerce involving taxable goods or services in that state. Because of the
potential revenue impact of such a rule for local jurisdictions, there was
likewise recognition that provision needed to be made to ensure the protection
16
NTA, Description of the Organization and Operations of the Communications and Electronic
Commerce Tax Project (undated), http://ntanet.org/ (accessible from the NTA homepage by clicking on ECommerce and Tax Policy: Official Documents: OD-1).
17
Consequently, the NTA Report did not make specific recommendations for addressing the
problems raised by state taxation of electronic commerce. NTA, Communications and Electronic
Commerce Tax Project Final Report (Sept. 7, 1999), http://ntanet.org/ (accessible from the NTA homepage
by clicking on E-Commerce and Tax Policy, Final Report). Nevertheless, it did examine and thoughtfully
analyze the critical questions raised by such taxation. For a fuller discussion of the report, see WALTER
HELLERSTEIN & JOHN A. SWAIN, STREAMLINED SALES AND USE TAX ¶ 2.02 (2004).
18
Although formal votes were taken on a number of issues, these votes were contingent on
reaching agreement on other issues, and the one operating principle on which Project participants did agree
was that nothing was agreed to until everything was agreed to. Because the Project was unable to reach
consensus on an overall set of recommendations, the Report emphasized that it would seriously
misrepresent the Project’s work if one were to pluck from that work any of its tentative and preliminary
findings, including those reached by a formal vote, and represent them as the Project’s conclusion.
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and equitable distribution of revenues to local jurisdictions. Although the
SSTP abandoned the goal of one rate per state, it did adopt significant rate
simplification measures.19

Tax base. The Project rejected proposals to require states to adopt a uniform
tax base, and participants generally agreed that state authority to determine
taxability or exemption of goods and services should be preserved, or at least
that such authority must be accepted as political reality. Similarly, the SSTP
made no attempt to impose a uniform tax base among the states.

Uniform “menu” defining goods and services. Notwithstanding general
agreement that imposition of a uniform base would be either unrealistic or
undesirable, participants acknowledged the very real problem that
inconsistent definitions of identical products created for multistate sellers.
Project members generally agreed that it would be desirable for the states to
develop a uniform “menu” that they would use to define goods and services
for sales and tax purposes while at the same time retaining the authority to
determine whether or not such goods and services should be taxed. This also
would simplify the development of tax compliance software. The definitional
menu concept became a central feature of SSUTA.20

Uniform Sourcing Rules. For sourcing of transactions for sales and use tax
purposes, the NTA Project members were generally of the view that
transactions should be sourced to the state of use or destination, and sourcing
19
20
SSUTA § 308.
See SSUTA §§ 327 and App. C.
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to a sub-state level should not be required. SSUTA followed this general
approach to transaction sourcing, although local sourcing is required.21

Simplification of State and Local Sales and Use Tax Administration.
Anticipating the approach of the SSTP, the Project recognized that
simplification of current sales and use tax administration was critical,
regardless of its possible linkage to extending the duty to collect tax to certain
remote sellers. Although it did not adopt a formal recommendation endorsing
specific proposals for administrative simplification, the Project examined the
following types of simplifications: uniform vendor registration forms;
uniform sales and use tax returns; uniform state laws for bad-debt deductions;
use of direct-pay permits; uniform exemption certificates and other exemption
administration simplifications; and simplified audit, assessment, and appeal
procedures for multistate sellers.
Three key issues blocked the formation of a more comprehensive and definitive
consensus on the sales and use taxation of electronic commerce. First, there was little
interest in seizing the moment to pursue more fundamental sales tax reform, such as
expanding the base to including services and excluding business purchases from the base.
Second, business and government were divided on the issue of expanding the duty to
collect sales and use taxes beyond the existing physical presence test. Many business
participants were unwilling to endorse the idea of expanding nexus because of the lack of
details concerning sales tax simplification and a potential “spillover” effect on other
21
See SSUTA §§ 309-15.
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taxes, e.g., the concern that an agreement for a more relaxed nexus standard in the sales
and use tax context would be invoked by states in asserting income tax nexus.22
Third, no consensus was achieved on the best means for implementing sales tax
reforms. Still, it is worth considering briefly the Project’s consideration of the
implementation issue because it foreshadows the approach eventually taken by the SSTP.
The Project considered two basic approaches to implementing its recommendations—
federal legislation and cooperative state action, as well as a hybrid of these two
approaches. Those supporting a federal legislative approach to implementation believed
that federal legislation was the only effective way to ensure uniformity in the adoption of
any proposals to modify existing state and local tax systems. Those supporting a
cooperative state approach to implementation believed that it would be more sensitive to
state concerns than federal legislation. Proponents of voluntary state action recognized,
however, that federal action (either legislative or judicial) would be necessary to expand
the duty of remote sellers to collect use taxes beyond that permitted by current Commerce
Clause jurisprudence.
A hybrid approach would have blended both state and federal action. Under this
approach, interested states would develop a multistate tax compact creating a harmonized
tax system, and Congress would remove most potential constitutional objections to the
rules embodied in such a compact by approving it.23 States not enacting the harmonized
system through the compact would remain subject to preexisting constitutional
limitations on their taxing authority. This approach would allow states to retain their
See generally Kendall L.Houghton & Gary C. Cornia, The National Tax Association’s Project
on Electronic Commerce and Telecommunications Taxes, 53 NAT’L TAX J. 1351 (2000).
23
The most significant of these potential objections are the judicially created Commerce Clause
restraints on the states’ power to require remote vendors to collect sales and use taxes.
22
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historic authority over the details of their tax system while permitting Congress to act to
encourage consistency and uniformity in state and local taxation. Although as a technical
matter the SSTP and SSUTA reflect the cooperative or voluntary model of tax
simplification described above, as a matter of political reality the hybrid approach may
more accurately describe the broad initiative being undertaken by the SSTP leadership
and their allies in Congress.
B. The Advisory Commission on Electronic Commerce
In 1998, Congress joined the debate over state taxation of electronic commerce
with its adoption of the Internet Tax Freedom Act (ITFA).24 Besides imposing limited
substantive restraints on the states’ power to impose taxes on Internet access or to impose
“multiple” or “discriminatory taxes” on electronic commerce, ITFA established the
Advisory Commission on Electronic Commerce (ACEC or the Commission), and required
that it be composed of representatives from the federal government, state and local
governments, and the private sector.
Congress charged the Commission with conducting a thorough study of federal,
state, local, and international taxation of transactions using the Internet and other
comparable activities. Among the state tax issues that Congress directed the Commission
to study—many of which were currently under consideration by the NTA Project—were
an examination of (1) model state legislation that would both provide uniform definitions of
taxable/exempt products and ensure that Internet-related transactions would be treated in a
24
Title XI of the Omnibus Consolidated and Emergency Appropriations Act of 1998, Pub. L.
No.105-277, §§ 1101-04, 112 Stat. 2681-719 (1998) (ITFA).
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tax-neutral manner; (2) the effects of the taxation (or absence of taxation) of all interstate
sales; and (3) ways to simplify federal, state, and local taxes on telecommunications
services.25 Congress directed the Commission to prepare a report within eighteen months
(by April 2000) reflecting the results of its study and including legislative recommendations.
Like the NTA Project, the ACEC never reached consensus on the key issues it
examined because of the deep political and philosophical divisions among its members.26
Therefore, it never made any recommendations because its authorizing legislation required
that any Commission recommendation command a two-thirds supermajority.27
Accordingly, the Commission’s most important legacy was the spate of proposals it
stimulated when, in the course of its deliberations, it invited the public to submit proposals
for resolving the problems raised by state and local taxation of electronic commerce.
Indeed, one of these proposals—Utah Governor and Commission member Michael Leavitt’s
proposal for a “streamlined sales tax system,”28—established the framework for the
formation of the SSTP.
Speaking for at least the eight ACEC commissioners representing state and local
governments, Governor Leavitt, who was also serving as chairman of the National
Governors’ Association, endorsed a proposal under which “states and localities agreed to
25
ITFA § 1102(g)(2).
The Commission was composed of nineteen members, including three representatives from the
federal government (the Secretary of Commerce, the Secretary of the Treasury, and the United States Trade
Representative); eight representatives from state and local governments (including at least one from a state
without a sales tax and one from a state without an income tax); and eight representatives of the electronic
commerce industry (including small business), telecommunications carriers, local retail businesses, and
consumer groups. The Senate Majority Leader and the Speaker of the House were given the right to appoint
five members each, and the Senate Minority Leader and the House Minority Leader were given the right to
appoint three members each. From the outset, the discussions among the Commission members reflected
profound differences in outlook that one observer described as an “ideological circus. John B. Judis, Taxing
Issue, THE NEW REPUBLIC, Oct. 11, 1999, available at
http://www.tnr.com/archive/1099/101199/judis/101199.
27
“No finding or recommendation shall be included in the report unless agreed to by at least twothirds of the members of the Commission.“ ITFA § 1103.
28
Statement of Governor Mike Leavitt, ACEC, Report to Congress, App. A pp. 71-73 (2000). The
proposal was firmly grounded in the work of the NTA Project.
26
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undertake an extensive and comprehensive plan to simplify antiquated state sales and use
tax systems in exchange for the clear right to collect those taxes.”29 According to Governor
Leavitt’s proposal, the requirements for a “simplified” sales and use tax system included,
but were not limited to:
 Centralized, one-stop registration system
 Uniform tax base definitions
 Uniform, simple sourcing rules
 Uniform exemption administration rules (including a database of all exempt entities
and removal of “good faith” acceptance rule30)
 Appropriate protection of consumer privacy
 Methodology for certifying software used in the sales tax administration process for
tax rate and taxability determinations
 Uniform bad debt rules
 Simplified, consistent tax returns and remittance forms
 Consistent electronic filing and remittance methods
 State administration of all state and local sales taxes
 Uniform audit procedures
 Reasonable compensation for remote sellers
 De minimis threshold below which small business remote sellers would not be
29
Statement of Governor Mike Leavitt, ACEC, Report to Congress, App. A, p. 71 (2000).
The reference is to the rule in force in many states that a seller is relieved of the obligation to
collect a sales or use tax on the basis of the purchaser’s exemption certificate only when it accepts the
certificate in “good faith.” Such a rule is particularly nettlesome to vendors because it puts the burden on
sales personnel to determine the legitimacy of the purchaser’s exemption claim, a determination they are
often in no position to make, and one that can too easily be second guessed with the benefit of hindsight.
30
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required to collect use tax31
Governor Leavitt’s proposal also recommended that Congress should enact
legislation authorizing the states to develop and enter into an Interstate Sales and Use Tax
Compact “[t]o implement this streamlined sales tax system.”32 The proposed legislation
contemplated that states joining the Compact would be required to adopt a simplified sales
tax system embodying the criteria identified above. States so doing would then be
authorized to require remote sellers exceeding the sales volume threshold to collect use tax
on all taxable sales into a state. Although Governor Leavitt’s proposal for a streamlined
sales tax system may be identified as the template for the SSTP, he was neither acting alone
nor in a vacuum when he advanced his plan. Indeed, as chairman of the National
Governors’ Association, Governor Leavitt was very a much a spokesperson for the states
(and tax administrators within those states) who were committed to the ideas he was
proposing and indeed were already engaged in implementing them.
C. Antecedents to Streamlining: Summary and Conclusion
The key contributions and lessons of these precursors to the SSTP can be
summarized as follows: First, an external economic event—the emergence of electronic
commerce—was a key stimulus behind state, business, and Congressional interest in
sales tax simplification and reform. Earlier efforts were pursued largely in isolation by
state governments, against whom a well-organized direct marketing industry served as an
effective counterpoint. Moreover, these earlier efforts were limited largely to the
31
Statement of Governor Mike Leavitt, ACEC, Report to Congress, App. A, p. 72 (2000).
Statement of Governor Mike Leavitt, ACEC, Report to Congress, App. A, p. 71 (2000)
(emphasis supplied).
32
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elimination of the physical presence nexus test without pursuit of a concomitant reduction
in compliance burden. Second, expansion of the scope of reform beyond nexus
liberalization was a key ingredient in stimulating the broader business community to
become an active and constructive participation in the reform process. Third, having
business and government participate on equal footing in the proposal development stage
proved ineffective. Their interests seemed too deeply divided. In particular, although
willing to entertain the possibility of nexus expansion, business interests were generally
unwilling to sign off on the idea unless simplification were more than an abstract
proposal. Furthermore, business interests conditioned support for sales and use tax
nexus expansion on state endorsement of business activity nexus contraction, something
states were and remain unwilling to concede. Fourth, although comprehensive consensus
proposals were never adopted, the NTA Project and ACEC produced most if not all of the
substantive reform ideas embraced by the SSTP. Indeed, de facto consensus on many of
these proposals was developed during these antecedent deliberations. Fifth, although not
a novel idea, the NTA Project and ACEC reinforced the notion that an effective solution
to the sales tax issues raised by electronic commerce must come from either a cooperative
effort among the states or from Congress (or both). Sixth, despite the window of
opportunity opened by the policy debate stimulated by electronic commerce, little interest
in fundamental sales tax reform was generated among the key actors.
17
DISCUSSION DRAFT
IV. The Streamlined Sales Tax Project
A. Guiding Principles: Applying the Lessons of the Past
The SSTP’s approach to sales tax simplification and reform has been shaped largely
by the lessons learned from its precursors. First, the SSTP is state initiated and controlled.
Only the states are formal, voting members. Without state control, drafting a concrete
proposal that would satisfy state interests had proved elusive. Second, in a concession to
political reality, the SSTP has adopted the principles of “revenue neutrality” and “base
neutrality.” Put differently, the SSTP has for the most part limited its focus to
administrative simplification. Uniform base definitions have been developed, but only for
the purpose of creating a menu of taxable and non-taxable items from which states can
select. Third, in another concession to political reality, the SSTP has made no direct effort
to expand its sales tax collection jurisdiction to remote sellers. Simplification has been
pursued as a valuable reform in its own right, and collection of tax by remote sellers is
required only if they choose to participate in the simplified tax regime on a voluntary basis.
That said, states are clearly hoping that Congress or the courts will find that the SSUTA
simplifications will be sufficient to remove the factual predicate for the physical presence
test in member states, thus clearing the way for its ultimate repeal.
These concessions have served the valuable purpose of encouraging the business
community to participate in the streamlining process, thus building a broader consensus
around the streamlining movement. The greater business community has no principled
objection to streamlining per se. Indeed, it is a primary beneficiary of streamlining. Thus it
18
DISCUSSION DRAFT
has been in the business community’s interest to participate in the formulation of the
streamlined regime. This participation, in turn, has broadened the streamlining coalition
beyond a mere coterie of states. The streamlining coalition remains fragile, however, in part
because of the business community’s insistence on various quid pro quos for congressional
approval of the nexus-expansion subtext of the of the streamlining initiative. We examine
these political issues in Part V of this paper.
B. Overview of the Streamlining Process
1. The SSTP
The SSTP was officially organized in March 2000 by participating states and the
District of Columbia, shortly before the ACEC issued its final report.33 According to its
organizing document,34 the SSTP’s mission was to “develop measures to design, test and
implement a sales and use tax system that radically simplifies sales and use taxes.”35 A
state could become a “participating state” eligible to vote at SSTP meetings by officially
indicating its intent to support the SSTP’s mission and by designating a representative to
vote on the state’s behalf. States unwilling to join the SSTP as participating states were
nevertheless eligible participate in the SSTP’s work as “observer states.”
33
The SSTP treats the District of Columbia as a state, and we shall do the same throughout this
discussion. See Structure and Operating Rules, Streamlined Sales Tax Project, § II(A)(1), March 30, 2000,
available at www.streamlinedsalestax.org.; Streamlined Sales Tax Implementing States, Rules of
Procedure, § B(1) (adopted Nov. 29, 2001, amended January 18, 2002), available at
www.ncsl.org/programs/fiscal/sstisrules.
34
Structure and Operating Rules, Streamlined Sales Tax Project, March 30, 2000, available at
www.streamlinedsalestax.org.
35
Structure and Operating Rules, Streamlined Sales Tax Project, March 30, 2000, available at
www.streamlinedsalestax.org.
19
DISCUSSION DRAFT
The initial task of the SSTP was to draft a fundamental “constitutional”
document—the Streamlined Sales and Use Tax Agreement (SSUTA or the Agreement)—
the substantive, administrative, and governance rules to which states that are parties to
SSUTA must adhere. The SSTP immediately undertook this task, which occupied the
better part of two years.
The SSTP conducted (and continues to conduct) its work through a co-chaired
steering committee and a number of working groups. SSTP participants are generally
state revenue department administrators, but they also include representatives of state
legislatures and local governments. Businesses representatives actively participate in the
SSTP through attendance and testimony at open meetings, comments on proposals, and
informal offers of expertise.36
2. The Streamlined Sales Tax Implementing States
In November 2001, as SSUTA was being drafted, the states that had enacted
legislation authorizing participation in the streamlining effort37 organized the Streamlined
Sales Tax Implementing States (SSTIS). In substance, the SSTIS was the body that
represented the participating states. Its stated purpose was “to finalize an interstate
agreement to simplify and modernize sales and use tax administration and to recommend
It is worth noting, however, that nongovernmental participants do not have a “seat at the table.”
Rather, business representatives are invited to submit commentary and engage in discussions with SSTP
participants, but they have no formal role in the Project. Some members of the business community have
criticized this aspect of the process and its influence on the nature of the “reform” emerging from the SSTP.
37
The Implementing States generally enacted one of two similar forms of legislation (either the
“Uniform Sales and Use Tax Administration Act” (as approved by the SSTP on December 22, 2000, and
amended on January 22, 2001), or the “Simplified Sales and Use Tax Administration Act” (as adopted by
the National Conference of State Legislatures’ Executive Committee on January 27, 2001)). These acts
authorized the state to enter into the Agreement, if it met specified criteria relating to sales tax
harmonization and simplification.
36
20
DISCUSSION DRAFT
the same to the states for implementation.”38 In contrast to the SSTP, which may be
viewed as the technical arm of the streamlining initiative, the SSTIS may be viewed as its
the political arm. It was contemplated that once the Agreement goes into effect, the
SSTIS would be dissolved and a new governing body would be formed in accord with the
Agreement’s governance rules.39
3. Adoption of SSUTA
In November 2002, the SSTIS adopted the Streamlined Sales and Use Tax
Agreement that SSTP representatives had been drafting over the previous two years.40
Despite the significance of the Agreement—it has been described as “a blueprint for
uniformity that promises to revolutionize sales tax”41—it is critical to keep in mind that
SSUTA is in significant part no more than a blueprint whose basic requirements need to
be implemented by more detailed legislation. At this writing, some states have adopted
legislation conforming to all or part of the Agreement, and others are considering such
legislation.42 The SSTP leadership has identified October 2005 as the target date for the
SSTP to become operational.43 As we have already noted, taxpayer participation in the
38
Streamlined Sales Tax Implementing States, Rules of Procedure (adopted Nov. 29, 2001,
amended January 18, 2002), available at www.ncsl.org/programs/fiscal/sstisrules.
39
Tax Management (BNA), Streamlined Sales and Use Tax Guide, MULTISTATE TAX REP., Vol.
9, No. 12, Dec. 27, 2002, p. S-8.
40
Streamlined Sales and Use Tax Agreement (adopted November 12, 2002), available at
www.streamlinedsalestax.org.
41
Tax Management (BNA), Streamlined Sales and Use Tax Guide, MULTISTATE TAX REP. Vol.
9, No. 12, Dec. 27, 2002, p. S-3.
42
See State Legislative Status of Streamlined Sales and Use Tax Agreement, available at
www.streamlinedsalestax.org.
43
See, e.g., Tax Management (BNA), States Target October 1, 2005, for Collections Under New
Streamlined Sales Tax System, Daily Tax Report, No. 152, August 9, 2004, p. H-2. See also infra notes 6163 and accompanying text.
21
DISCUSSION DRAFT
SSTP system as presently designed is entirely voluntary, but Congress has the power to
make taxpayer participation mandatory.
4. Continuing Work of the Streamlined Sales Tax Project
Since the approval of SSUTA in November 2002, the SSTP has continued to meet
on a regular basis as various working groups consider a wide variety of issues relating to
the implementation of the Agreement and the resolution of questions that the Agreement
left unanswered. SSUTA contemplates that once the Agreement is up and running, the
SSTP will be replaced by a similarly structured State and Local Advisory Council.44 As
has been the case with the SSTP, which has served as the technical arm of the SSTIS, the
State and Local Advisory Council is expected to be active in developing and analyzing
Agreement amendments, including new definitions; consulting on interpretive questions;
and assessing states’ compliance or noncompliance with the Agreement. SSUTA also
creates a Business Advisory Council which is expected to advise the board on similar
matters, and the Agreement contemplates that these two advisory committees will work
together to develop consensus proposals under the Agreement, as has occurred between
the SSTP and business community representatives during the SSTP process.45
44
45
SSUTA §§ 810–811.
Each Council “shall advise and assist” the other. SSUTA §§ 810–811.
22
DISCUSSION DRAFT
5. The Conforming States Committee
The SSTIS has formed a Conforming States Committee comprised of
representatives of these conforming states to act as a transitional body until the governing
board comes into existence on the Agreement’s effective date.46 Although the SSTIS
remains in existence and retains important formal powers, such as the power to amend
the Agreement,47 there is a general understanding that it will be the conforming states that
comprise the initial governing board, and thus it is these states that should be
instrumental in planning for the board’s initial formation.
C. Overview of the Streamlined Sales and Use Tax Agreement (SSUTA)
The fundamental purpose of SSUTA is “to simplify and modernize sales and use
tax administration in the member states in order to substantially reduce the burden of tax
compliance.”48 To accomplish this purpose, SSUTA “focuses on improving sales and use
tax administration for all sellers and for all types of commerce”49 in the following areas:
 State level administration of sales and use tax collections
 Uniformity in the state and local tax bases
 Uniformity of major tax base definitions
 Central electronic registration system for all member states
 Simplification of state and local tax rates
46
See Letter from Angela Monson and R. Bruce Johnson, Co-Chairs, SSTIS, to Delegates of the
SSTIS (April 7, 2004) (on file with authors).
47
See SSUTA § 703.
48
SSUTA § 102.
49
SSUTA § 102.
23
DISCUSSION DRAFT
 Uniform sourcing rules for all taxable transactions
 Simplified administration of exemptions
 Simplified tax returns
 Simplification of tax remittances
 Protection of consumer privacy
It is critical to recognize what SSUTA does and what it does not do. First, at the
most fundamental level of analysis, it is fair to say that SSUTA does nothing. Despite its
sweeping provisions for reform of state sales and use tax systems, standing by itself
SSUTA is nothing more than the agreement of representatives of states that have
committed themselves to “to simplify and modernize sales and use tax administration and
to recommend the same to the states for implementation.”50 By approving SSUTA, the
SSTIS did not effect any change in the states’ sales and use tax regimes. Unless and until
individual state legislatures act to conform their statutes to SSUTA requirements, the
Agreement, viewed as a freestanding document, is little more than an expression of
intent.
Second, notwithstanding SSUTA’s lack of independent force, it is also fair to say
that the Agreement already has had a significant albeit indirect impact on some states’ tax
regimes. In conforming, in whole or in part, to the requirements of SSUTA,51 a number
of states have made important changes in their sales and use tax provisions. The legal
status of many of these changes (e.g., to definitions, sourcing rules, administrative
requirements) does not depend on the effective date of SSUTA. Such changes are (or
50
Streamlined Sales Tax Implementing States, Rules of Procedure (adopted Nov. 29, 2001,
amended January 18, 2002), available at www.ncsl.org/programs/fiscal/sstisrules.
51
As noted above, a number of states have enacted legislation designed to conform their state
sales and use tax statutes to SSUTA. See State Legislative Status of Streamlined Sales and Use Tax
Agreement, available at www.streamlinedsalestax.org.
24
DISCUSSION DRAFT
will become) part of a state’s sales and use tax law whether or not SSUTA ever takes
effect. Accordingly, even if SSUTA never enters into force as an interstate agreement,52
these changes are important in their own right, and they will become increasingly
important as more states modify their sales and use tax statutes to conform to SSUTA.
Third, when, as, and if a sufficient number of states with a sufficient proportion of
the population enact legislation conforming to SSUTA so that the Agreement becomes
effective, it is important recognize that the streamlined tax regime created by SSUTA is
voluntary, although taxpayers subject to the taxing authority of a state under traditional
nexus rules will, of course, have an obligation to comply with that state’s tax laws.53 No
seller is required to register under the Agreement54 and collect sales or use taxes in states
in which it is not constitutionally required to do so under current law. No seller is
required to use a Certified Service Provider55 or a Certified Automated System56 in
conjunction with the collection of sales or use taxes. By the same token, sellers failing
to register under SSUTA will not be eligible for its considerable advantages, including
relief from certain liabilities,57 amnesty for certain uncollected or unpaid taxes,58 and
enhanced compensation for tax collection obligations.59
Finally, whatever SSUTA does or does not accomplish directly or indirectly before
or after its effective date, it is clear that Congress possesses ample power to make
52
According to its terms, SSUTA takes effect only when at least ten states, comprising at least 20
percent of the total population of all states imposing a sales tax, have petitioned for membership and been
found in compliance with the Agreement. SSUTA § 701.
53
Such as those described in the preceding paragraph.
54
See SSUTA § 303, discussed infra ¶ 19A.07[2].
55
SSUTA § 203.
56
SSUTA § 202.
57
SSUTA § 306.
58
SSUTA § 402.
59
SSUTA §§ 601-603.
25
DISCUSSION DRAFT
SSUTA mandatory,60 though subject to whatever modifications to SSUTA that Congress
may deem appropriate before requiring sellers to participate in such a system.
D. The Current Streamlining Landscape
As noted at the outset, the streamlining train has yet to reach the station, and to
report on current events as they flash by our window would have little lasting value.
Still, of necessity, we present a brief snapshot of the status of streamlining as of this
writing. SSUTA, as amended, imposes various thresholds for the Agreement to become
effective.61 At this time, it appears that these thresholds have been satisfied, and as of
May 9, 2005, 18 states have certified their compliance with SSUTA and petitioned for
membership.62 An initial organizing meeting is scheduled for July 2005 during which
states in compliance will be granted Member status and states in near compliance (or in
full compliance but for delayed conforming legislation effective dates) will be granted
Associate Member status (with more limited rights). The tax regime then created under
that Agreement and pursuant to underlying complying state legislation would go into
effect on October 1, 2005.63
Although SSUTA is in principle designed to stand on its own, most participants
agree that it ideally should be reinforced by federal legislation formally granting states
that have conformed to SSUTA the authority to impose a use tax collection obligation on
60
See generally Charles E. McLure, Jr. & Walter Hellerstein, Congressional Intervention in State
Taxation: A Normative Analysis of Three Proposals, ST. TAX NOTES, March 1, 2004, p. 721 (also in TAX
NOTES, March 15, 2004, p. 1375).
61
SSUTA §§ 701-02.
62
Streamlined Sales Tax Project, Certificates of Compliance webpage, available at
http://www.streamlinedsalestax.org/certificates%20of%20compliance.htm.
63
See Emily Dagostino, Implementing States OK Partial Streamlining Membership, 2005 ST.
TAX TODAY 74-2, at Doc. 2005-8083 (April 19, 2005).
26
DISCUSSION DRAFT
remote sellers. Such legislation was introduced in the 108th Session of Congress and is
expected to be introduced again in the current session.64 The earlier bills excluded from
its scope sellers with less than $5 million of remote sales in the prior year; established
certain minimum simplification standards; and provided for federal judicial review under
specified circumstances.
V. The Political Economy of Streamlining: Interests, Ideas and Timing
A. Interests
Though not a startling conclusion, the progress, contours, and detours of
streamlining can be explained largely by traditional interest group politics, which we
examine below.
1. The Initial Coalition
A broad consensus has formed among tax authorities and taxpayers that
administrative simplification of sales taxes is a desirable goal, and such simplification is
the guiding principle of streamlining. True, motives may be mixed. States see
streamlining as a means to collecting tax from remote sellers, although, undoubtedly,
states are also motivated by the promise of reduced administrative burdens, notions of
good government, and the desire to “get it right.” The greater business community sees
the obvious value in reduced compliance burdens, including avoidance of the costs of tax
64
Streamlined Sales and Use Tax Act, S. 1736, 108th Cong., 1st Sess (2003).
27
DISCUSSION DRAFT
collection errors, sweetened by the prospect of amnesty for specified preexisting tax
liability.65
Even traditional mail-order companies recognize, in principle, the value of sales
tax simplification, though they are much more reluctant to acknowledge that streamlining
has introduced enough simplification to warrant nexus expansion.66 Still, some remote
sellers have participated actively and constructively in the SSTP, apparently making the
judgment that their interests lie with shaping and enhancing the streamlining outcome
rather than single-mindedly hanging on to the crumbling edifice of Quill.67 Also, some
retailers have business models that encourage participation in streamlining even if some
of their operations are arguably remote. For example, Amazon.com sells both on its own
account and as a representative/agent for sellers with an in-state brick and mortar
presence. When selling on behalf of these third parties, therefore, it must often collect
tax, and so it is benefited by a streamlined regime in this regard.68
65
Failure to collect sales tax properly has dire consequences to the seller, who, by the time the
error is discovered on audit, has usually lost the opportunity to collect the tax from the customer. Similarly,
overcollection of sales tax can lead to class action consumer lawsuits against vendors, who are often then
barred on procedural grounds from obtaining refunds from the taxing jurisdictions to which tax was
erroneously paid. Compliance burdens also include the costs to purchasers of claiming, or failing to claim,
exemptions under a multiplicity of conflicting substantive and administrative rules.
66
George S. Isaacson, A Promise Unfulfilled, How the Streamlined States Tax Project Failed to
Meet its Own Goals for Simplification of State Sales and Use Taxes, 2003 ST. TAX TODAY 2007-5, at Doc.
2003-22799 (Oct. 27, 2003) (critical commentary by a representative of the Direct Marketing Association).
67
See Frank Shafroth, The Tax Doctor: Amazing.com: Intergovernmental Tax Consequences in
an Online Economy, 2005 ST. TAX TODAY 68-3, at Doc. 2005-6597 (April 11, 2005) (interviewing Robert
Comfort, Amazon.com’s vice president of tax and tax policy and Richard Prem, Amazon.com’s director of
global indirect taxes).
68
Id.
28
DISCUSSION DRAFT
2. When Reform Hurts: Local Governments and Others
That politics as usual looms large in the streamlining process is illustrated too
when streamlining moves beyond mere administrative reform and threatens a particular
interest. As already noted, remote sellers are reluctant to embrace streamlining because
of the substantive impact on their industry, though some may have come to the political
judgment that the best strategy is to participate in making the end product as palatable as
possible.
SSUTA’s destination sourcing rules, though at first blush merely simplifying
reforms reflecting sound sales tax policy,69 have provoked so strong an outcry that the
streamlining movement is threatened, at least in some states.70 Two major interest groups
are affected. The first are businesses71 that make intrastate deliveries of products and
services. Traditionally, many states have allowed these businesses to source sales to their
business location (origin) rather than to the customer’s location (destination). Under
SSUTA’s destination sourcing rules, however, deliveries (pizza, for example) must be
sourced to the address of each delivery customer.72 The second interest group affected by
destination sourcing is comprised of cities whose share of sales tax revenues will be
negatively affected by a shift from origin-based to destination-based sourcing.
69
Namely, that consumption should be taxed where consumption occurs. See Committee on
Fiscal Affairs Organisation for Economic Cooperation and Development, The Ottawa Taxation Framework
Conditions, reproduced in Organisation for Economic Cooperation and Development, Taxation and
Electronic Commerce: Implementing the Ottawa Framework Conditions, Annex I (2001).
70
See generally Charles Collins, Will the Failure of Some States to Enact Destination-Based
Sourcing Prevent Streamlining From Becoming Effective July 1?, 2005 ST. TAX TODAY 58-2, at Doc.
2005-5504 (March 28, 2005).
71
Generally small and local businesses.
72
SSUTA § 310.
29
DISCUSSION DRAFT
Political pressure in Ohio and Kansas—both states that are generally considered
to be SSUTA-compliant—has provoked various responses including adoption of a
relaxed enforcement posture and introduction of legislation repealing or delaying the
implementation of the destination sourcing rules.73 Such legislation thus threatens to
bring these states out of compliance. Similar pressures are being brought to bear in the
SSUTA-compliant states of Tennessee74 and Utah,75 and caused the Washington and
Texas legislatures to adopt SSUTA “compliance” legislation while retaining origin
sourcing. As a result, Washington and Texas generally are considered to be not in
compliance with SSUTA.76 The sourcing issue (among others) is an impediment to
consideration of SSUTA compliance legislation in states such as California, Illinois, and
Arizona.77
The concerns of many local jurisdictions extend beyond sourcing. SSUTA
requires state and local tax base uniformity, a single local rate, and state-level
administration.78 While this is the norm in many states already, these requirements have
blocked serious consideration of SSUTA compliance legislation in jurisdictions such as
73
Chris W. Courtwright, Kansas House Panel OKs Return to Origin-Based Sales Tax Sourcing,
2005 ST. TAX TODAY 54-8, at Doc. 2005-5884 (March 22, 2005).
74
See William F. Fox, Local Government Implications of the Streamlined Sales Tax Project in
Tennessee, ST. TAX NOTES, March 28, 2005, p. 935 (reporting on redistribution of local sales tax revenues
in Tennessee based on change to destination sourcing).
75
See Utah Lawmakers Again Delay the Effective Date of Sales Tax Streamlining, 2005 ST. TAX
TODAY 45-32, at Doc. 2005-4718 (March 9, 2005); Ohio Enacts Law to Aid in Transition to Streamlined
Sourcing, 2005 ST. TAX TODAY 29-20, at Doc. 2005-2730 (Feb. 14, 2005) (Ohio's tax commissioner would
have to work with other states implementing the Streamlined Sales and Use Tax Agreement to encourage
the adoption of an amendment allowing certain vendors to source sales at their places of business).
76
See supra note 46.
77
There is hope in some quarters that business concerns about destination sourcing can be
addressed by the adoption of certified compliance software and (perhaps) narrow sourcing exceptions for
certain types of businesses or transactions. Local government concerns about revenue shifting will have to
be addressed on a state-by-state basis by each individual legislature.
78
See SSUTA §§ 301-02, 304-05, 308.
30
DISCUSSION DRAFT
Arizona and Colorado,79 where many cities jealously guard their independent tax bases
and administrative authority.
In short, state participation in streamlining remains subject to the political
dynamics within each state. This impediment will probably not thwart streamlining in a
critical mass of states, but it may retard the spread of streamlining on a state-by-state
basis. If streamlining proves, however, to enhance sales tax revenues in streamlined
states, then the political calculus may change. The more measurable promise of
enhanced revenue could bring reluctant states into the streamlining fold.
3. The States
The dominant theme of relations among the states during the streamlining process
has been the remarkable degree of individual sacrifice to the greater good. The adoption
of uniform definitions where there were none before has inevitably created revenue
winners and losers.80 Of course, such self-sacrifice may reflect enlightened self-interest.
If not for the carrot/stick of revenue gain/loss attributable to remote sellers, streamlining
(at least as a cooperative enterprise and not a congressionally imposed regime) would
probably have remained a pipe dream. The politically shrewd state may well let go of its
revenue from Twixt bars—now no longer candy—as a means to add L.L. Bean to its use
79
Colorado is the sole sales tax state this is neither a participating nor observer state.
The scope of many member state exemptions of, say, food products, either expanded or
contracted after the adoption of a uniform definition of food because the pre-existing definitions in many
states varied from each other. The only way there would have been no losers (from the perspective of
raising revenue) is if the SSUTA-required definition were as narrow or narrower than the narrowest preexisting state definition, which is unlikely both probabilistically and politically, and, in any event, is not the
case.
80
31
DISCUSSION DRAFT
tax collection rolls.81 Maryland has taken a different approach to this trade-off, and will
try to have its figurative Twixt bar and eat it too. Specifically, Maryland backed off from
being a streamlining pioneer once it determined that adopting the uniform SSUTA
rounding rule would cost it $25 million annually. Instead, Maryland will wait until
congressional authorization of nexus expansion before embracing SSUTA and trading off
rounding losses for remote seller gains.82 Narrow pursuit of self-interest is not dead.83
4. The Private Sector
The broader business community—particularly the retailing and
telecommunications sectors—has been a valuable and constructive contributor to
streamlining on both the technical and political levels. Without business community
support, streamlining probably would have been “dead on arrival” in many state
legislatures. This is not to say, however, that traditional interest group politics do not
explain much of this contribution. Most businesses have no dog in the nexus fight and
are benefited by SSUTA’s promise of reduced tax compliance burden.
Taken at their word, businesses are nonetheless concerned that the abandonment
of the physical presence test for sales and use taxes may spill over into the business
activity tax (BAT) nexus arena. Whether physical presence is also required for BAT
81
SSUTA excludes from the definition of candy any food product that contains flour. SSUTA,
App. C, pt. II. Some states exempt food yet tax “candy.” See WALTER HELLERSTEIN & JOHN A. SWAIN,
STREAMLINED SALES AND USE TAX ¶ 4.02[3][c] (2004) (discussing SSUTA definitions of food and food
products).
82
HELLERSTEIN & SWAIN, supra note 81 at ¶7.13 (discussing uniform rounding rule and Maryland
concerns).
83
In fairness, one wonders why selecting a uniform prospective effective date among all the states
was not a modus operandi of the SSTP, at least for some of the required state-by-state conforming
provisions. This might have avoided the “you jump first” mentality.
32
DISCUSSION DRAFT
taxes is still hotly contested.84 Accordingly, from the very beginning of the discussions
of relaxed sales tax nexus rules in conjunction with the NTA Project, the business
community has insisted on legislation limiting the scope of BAT nexus as a condition for
sales and use tax nexus expansion, and legislation that would limit BAT nexus has been
introduced in Congress.85 Fortunately for the streamlining process, state and business
interests have agreed to disagree on this issue while continuing with the nuts and bolts of
building a streamlined sales tax. Once the states request that Congress bless streamlining
and authorize nexus expansion, however, the BAT nexus issue will come to the fore and
test the strength of the streamlining coalition. So far, the states have been unwilling to
accept this proposed trade-off.
Other interest groups are surfacing as the prospect of federal streamlining
legislation becomes increasingly imminent. Many in the remote selling industry are
insisting on a high de minimis sales volume threshold. The most recent proposal is for a
threshold of $5 million in annual remote sales.86 Here, the interests of small and large
sellers collide. For example, remote sellers like Amazon.com would like to make sure
that businesses operating under the seller-collective business model—notably
eBay.com—are not excluded from sales and use tax reporting obligations by federal
streamlining legislation.87 States have shown a willingness to compromise on the de
minimis issue in order to maintain a broad coalition and win congressional support,
84
See John A. Swain, State Income Tax Jurisdiction: A Jurisprudential and Policy Perspective,
45 WM. & MARY L. REV. 319 (2003).
85
See National Tax Association Communications and Electronic Commerce Tax Project,
Organizing Doc. 15, Statement of Position of Business Groups (Jan. 13, 1999) available at
ttp://www.ntanet.org (linking BAT nexus protection with use tax collection nexus expansion).
86
See supra note 64.
87
See Shafroth supra note 67 (interviewing Robert Comfort, Amazon.com’s vice president of tax
and tax policy and Richard Prem, Amazon.com’s director of global indirect taxes, who explicate position
that $5 million threshold is too high).
33
DISCUSSION DRAFT
despite the fact that it is difficult to justify a high sales volume nexus threshold in light of
the vendor compensation and third-party tax reporting services contemplated by SSUTA.
Additionally, the telecommunication industry has weighed in requesting that
streamlining legislation include a target date for mandatory streamlining of non-sales and
use tax telecommunications excise taxes. Again, it is the local governments that feel
most threatened, and the National Association of Counties, the National League of Cities,
and the U.S. Conference of Mayors have suggested a compromise “sense of the
Congress” provision in streamlining legislation that would bless and encourage a
telecommunications tax simplification process while allowing sales and use tax
streamlining to proceed unhindered.88 Whether a compromise can, or need be, worked
out remains to be seen.
Finally, Internet service providers and related interests are seeking to link
streamlining legislation with the legislation making the ITFA moratorium permanent.
Indeed, proposed legislation so doing has already been introduced into the 109th
Congress, assuring that this problem will not go away.89
5. Congress
Local Government Officials: “We Can No Longer Delay” While Waiting for Telecom
Simplification, 2005 ST. TAX TODAY 60-02, at Doc. 2005-6168 (March 30, 2005) (open letter from
representatives of local government organizations to Senators Michael Enzi and Byron Dorgan, anticipated
sponsors of federal streamlining legislation).
89
See Federal Lawmakers to Reintroduce Ban on Internet Access Taxation, 2005 ST. TAX TODAY
75-01, at Doc. 2005-8180 (April 20, 2005) (quoting Rep. Chris Cannon, chair of the House Judiciary
Subcommittee on Commercial and Administrative Law, linking streamlining legislation to passage of a
permanent ban on Internet access taxation). See also Internet Consumer Protection Act of 2005, H.R. 1685,
109th Cong., 1st Sess. (April 19, 2005); Internet Tax Nondiscrimination Act of 2005, H.R. 1684, 109 th
Cong., 1st Sess. (April 19, 2005).
88
34
DISCUSSION DRAFT
Of course, we cannot introduce congressional politics into the discussion without
discussing Congress. As Charles McLure has noted in a draft of his paper prepared as the
keynote address for this symposium,90 Congress’s track record in matters of state taxation
is not encouraging. Most typically, Congress fails to act at all. Perhaps this is wise. One
should first do no harm. When Congress has acted, the response is often a hasty fix of a
taxpayer concern that is adopted over the objection of state tax authorities. For example,
P.L. 86-272 (an income tax safe harbor for sellers of tangible personal property) 91 and the
Internet Tax Freedom Act (exempting Internet service providers) have little to
recommend themselves from a long-run tax policy perspective. Both were marketed as
temporary fixes to an immediate problem; both authorized broad-based studies of the
problem to serve as the basis for more considered legislation based on an appropriate
weighing of all of the policy concerns involved; yet P.L. 86-272 has remained on the
books since 1959, and ITFA, which was originally enacted as a three-year “moratorium”
on Internet taxation in 1998,92 was extended for two more years in 2001, retroactively
extended (as modified) through 2007 in 2004,93 and, as indicated above, it will soon be
permanent if some Congressmen have their way.94
To its credit, however, Congress adopted a sensible resolution of vexing cellular
phone tax sourcing issues by enacting the Mobile Telecommunications Sourcing Act in
2000.95 What distinguished this legislation from many other congressional forays into
state taxation was that it was jointly supported by both the telecommunications industry
90
Charles E. McLure, Jr., Understanding the Nuttiness of State Tax Policy: When States Have
Both Too Much Sovereignty and Not Enough (discussion draft).
91
See generally, JEROME R. HELLERSTEIN & WALTER HELLERSTEIN, I STATE TAXATION ¶¶ 6.166.27 (3rd ed. 1998 & Cum. Supp. 2005) (history and analysis of P.L. 86-272).
92
Pub. L. No. 105-277, Title XI, 112 Stat. 2681 (1998).
93
Pub. L. No. 108-435, § 2(c) 118 Stat. 2615 (2004).
94
See supra note 89 and accompanying text.
95
4 U.S.C. § 116 et seq.
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DISCUSSION DRAFT
and the states. The hope, of course, is that a sensible streamlining bill can be crafted that
enjoys similar joint support. Such support is threatened, however, by the attempts to link
streamlining to BAT nexus contraction, telecommunications tax simplification, and ITFA
extension.
Even if an acceptable state/local/private sector coalition can be held together,
federal legislation is not assured. Undoubtedly, the nexus-expansion feature of
streamlining will be (indeed, has been) labeled a tax increase by the remote selling
industry and hard-line anti-tax groups.96 Further, beyond the abstract label, the “tax
increase” will be highly visible to constituents who make remote purchases. Indeed,
remote sellers may be quick to remind consumers that their representatives in Congress,
not remote sellers, are the ones are responsible for the “new tax.” Consumers have not,
to date, been visible in the streamlining process. They are soon to be heard, however, as
Congress will certainly consider their potential outcry as it deliberates97 on streamlining
legislation.
B. Ideas
Tax experts and practitioners have long acknowledged the shortcomings of sales
tax complexity and administration. Though not powerful enough by itself, the consensus
around the streamlining “idea” must be added to the list of factors that has contributed to
the success of streamlining (however tentative). In their study of the Tax Reform Act of
96
Consumers are generally ignorant of or indifferent to their already existing use tax obligation.
“Deliberation, n. The act of examining one’s bread to determine on which side it is buttered.”
AMBROSE BRICE, THE DEVIL’S DICTIONARY (1906), available at www.thedevilsdictionary.com. As we
discuss in Part V.B below, we would hope that congressional deliberations will rise above this cynical
definition.
97
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DISCUSSION DRAFT
1986, Conlan, et. al., remind us of the underrated power of ideas.98 They quote quote
John Maynard Keynes, who observed: “The ideas of economists and political
philosophers, both when they are right and when they are wrong, are more powerful than
is commonly understood … I am sure that the power of vested interests is vastly
exaggerated compared with the gradual encroachment of ideas.”99 Certainly there is an
element is truth in this comment as applied to streamlining. Its tentative success has
surprised many, yet these same observers concede that streamlining (or something like it)
is the right thing to do. Perhaps it should not surprise us that every now and then the
right idea takes hold.
Participants in the SSTP, which has met on a near bi-monthly basis since late
2000, have commented that the “spirit of streamlining” is bigger than the sum of the
various participants. State taxing authorities and business participants alike often appear
to identify with the values of the SSTP as much as with the constituencies that they
represent. Streamlining is viewed as a worthy goal it is own right, and those involved
feel they are involved in something of historical importance: fighting the good fight;
“doing God’s work.”
The power of ideas will be tested in Congress. Congress usually sees little
political benefit to involving itself in state tax matters, particularly when asked to expand
or reinforce state taxing powers.100 Congress incurs the political cost of the tax increase
98
Timony J. CONLAN ET AL., TAXING CHOICES: THE POLITICS OF TAX REFORM, 240 (1990).
JOHN MAYNARD KEYES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY 38384 (1936) (New York: Harcourt Brace Jovanovich, 1964).
100
Except, perhaps, at the behest of industry. See, e.g., McCarran-Ferguson Act, 15 U.S.C § 1011
(1994) (removing insurance industry from scope of negative Commerce Clause in conjunction with
congressional overruling of United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533 (1944),
which held that the business of insurance was subject to the federal regulation under the Commerce
Clause). See generally 1 JEROME R. HELLERSTEIN & WALTER HELLERSTEIN, STATE TAXATION ¶ 6.08 (3rd
ed. 1998 & Cum. Supp. 2005).
99
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DISCUSSION DRAFT
perception without the concomitant benefit of increased federal revenues. Thus, when
states ask Congress for help, they must often appeal to its nobler sense of purpose; its
constitutional responsibility for regulating commerce; its desire, however latent, to do the
right thing. If the government/business streamlining coalition holds, it will be relatively
easy for Congress to do the right thing. If the coalition does not hold, then Congress
could do as much harm as good (for example, codifying anachronistic income tax nexus
rules).101 Or it might do nothing. If Congress does nothing, then the next forum for
testing the power of the streamlining idea may be the Supreme Court.102
C. Timing
Of course, the world is littered with good ideas that do not take hold. Timing and
circumstance are crucial, and this is true of streamlining. Without the confluence of
electronic commerce, state budgetary shortfalls, and the impetus of the Quill decision
coupled with Congressional inaction, streamlining probably would not have seen the light
of day. And it still has a long way to go.
VI. The Future of Sales Tax Reform
If streamlining takes hold, it will deserve recognition as a fundamental sales tax
reform because it can be credited with (1) introducing unprecedented administrative
simplifications and (2) precipitating (one anticipates) the repeal of the de facto exemption
101
102
See generally McLure & Hellerstein, supra note 60.
Assuming that the states are able to upload the SSUTA regime in a critical mass of states.
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DISCUSSION DRAFT
for remote sales. Little sales tax base reform, however, will be accomplished. Much
household consumption will remain untaxed (distorting consumer and producer choices)
while business purchases will continue to be taxed (causing distortive tax pyramiding).
The question presents itself: has streamlining or its lessons cleared a pathway to more
comprehensive reform?
There is cause for pessimism. Administrative reform creates few losers, and so
building the streamlining coalition has presented far fewer challenges than would tax
base reformation. Indeed, the streamlining process either slows or stalls whenever it
deviates from pure administrative reform—e.g., switching from origin to destination
sourcing of in-state sales. Further, as streamlining matures, interest groups have taken
notice and begun to lobby the SSTP for industry-specific measures. The pace of these
requests can only be expect to accelerate, and will doubtless continue when (and if)
SSUTA goes into effect, because the SSUTA governing board will provide low-cost,
one-stop shopping for special interests on a variety of issues. This is not all bad, as the
governing board will at least help to control entropy and ensure uniformity of result.
Still, one cannot expect fundamental reform to emerge if the governing board is
compelled to function solely in a reactive mode.
Of course, the power to do evil is often the power to do good. Streamlining has at
least created the institutional mechanism for consideration and coordination of
fundamental, nationwide sales tax reform. Such a movement would have to be
supported, however, by a political will that is not presently discernable. We would
speculate that the most probable spur to fundamental reform would be a nationwide
budgetary crisis of historic proportions. Base expansion would become necessary to
39
DISCUSSION DRAFT
avoid both public outcry and the tax avoidance that would accompany troublingly high
rates. Indeed, the politically acceptable solution under this scenario might be to trade-off
base expansion for lower rates. This, in essence, was the trade-off that made the federal
Tax Reform Act of 1986 politically palatable.103 The Tax Reform Act of 1986, however,
also promised revenue neutrality, not something that states could offer under this budget
crisis scenario. Further, if reform were motivated by the need to raise revenue, then it is
unlikely that the normative goal of excluding business purchases from the sales tax base
could be part of a reform package. In short, rationalizing the sales tax in a fundamental
way–expanding the base to include consumption of most household purchases of goods
and services but contracting it to exclude business purchases, now estimated at roughly
40 percent of the base104–would almost certainly lead to a rate increase.
One could also speculate that sales tax reform could result from some drastic shift
in the federal tax policy, such as the adoption of a VAT or national retail sales tax. States
might then be compelled to piggyback the federal system, as they do currently with the
income tax to varying degrees. Of course, there is no guarantee105 that a federal VAT or
retail sales tax would adhere to normative tax principles.
It is easy to expect everything from tax reform, get a little less, and think one has
gotten nothing. Notwithstanding its limitations, streamlining does constitute fundamental
and remarkable reform. We are unaware that anyone predicted with confidence that
103
For a succinct discussion of the factors that contributed to the passage of the TRA of 1986, see
Charles E. McLure, Jr., The Political Economy of Tax Reforms and Their Implications for
Interdependence: United States, in THE POLITICAL ECONOMY OF TAX REFORM 97 (Takatoshi Ito & Anne
O. Krueger, eds., 1992).
104
Robert Cline, et al., Sales Taxation of Business Inputs: Existing Tax Distortions and the
Consequences of Extending the Sales Tax to Business Services, ST. TAX NOTES, Feb. 14, 2005, p. 457;
Raymond J. Ring, Jr., Consumers' Share and Producers' Share of the General Sales Tax, 52 NAT'L TAX J.
79 (1999); Raymond J. Ring, Jr., The Proportion of Consumers' and Producers' Goods in the General
Sales Tax, 42 NAT'L TAX J. 167, 175 (1989).
105
Or even reason to expect.
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DISCUSSION DRAFT
states could successfully simplify and coordinate their sales tax administration to the
degree promised by streamlining. Thus acknowledging the limitations of human
foresight, we cannot close the door on the prospect of more fundamental reform. That
being said, the economic benefits of a true consumption tax remain largely theoretical
and obscure in the minds of most politicians and policymakers.
41