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National Tax Association
Communications And Organizing Documents (OD-5) PRELIMINARY STATEMENT OF DIRECTION ACHIEVING SIMPLIFICATION AND UNIFORMITY IN STATE NAD LOCAL SALES AND USE TAX ADMINISTRATION
NATIONAL TAX ASSOCIATION January 14, 1998 Preliminary Statement
of Direction Prepared by: Government Members of Steering Committee This document represents a preliminary response and statement of intent and direction from the Government members of the NTA Communications and Electronic Commerce Tax Project to the "Suggestions for Simplification" received from the Business members dated December 10, 1997. General Background Government members understand that simplification and uniformity are critical to being able to achieve and implement an expanded collection requirement. Therefore, as a matter of policy, we believe we should go as far as reasonably possible to respond positively to the suggestions of the Business members, within the constraints of our two fundamental policy standards -- those being support for our federal system and achieving maximum neutrality across types of sellers and taxpayers. The Government members of the Steering Committee and the associations we represent are committed to clear, nondiscriminatory tax policy, including the taxation of the sale of goods and services, however they occur and wherever the seller is located. Our role as government is to protect people from discriminatory action, and that requires tax systems that are fair, efficient, effective, and nondiscriminatory. Laws that result in court challenges because of inconsistent, discriminatory, or ambiguous language or application must be improved. We recognize likewise that laws that are burdensome and difficult or impossible to comply with are inappropriate and counterproductive. Administrability is a fundamental element of evaluating any tax law, and we recognize that the current system, particularly for multistate sellers (which any electronic commerce seller is by definition) falls far short of the optimum and must be improved. We need your suggestions for improvement and want to work with you in developing solutions. We will never walk away from these efforts, but we cannot succeed without your active participation. We remain interested in every proposal you have to make our tax systems meet these goals. However, it will take your full support along with ours to make enactment of these improvements a success. This effort is not one that we as government officials can lead alone. To a real extent, you are the leaders in this effort. Your businesses are growing and changing. The technologies you are developing in business will eventually be utilized in government services. Your suggestions and expertise will make government's understanding of and adoption of these technologies a success. It is important that you accept the role of proposers of change. The more clear and nondiscriminatory your proposals are, the easier they will be to be accepted and approved. The global economy is a reality today, and tax systems must work within that reality. State and local tax systems must be streamlined and simplified so that they are not barriers to international competition. Here again, your proposals are important. We will be strong partners in achieving that goal and avoiding a situation where there are separate directions for every community or even 50 different directions. However, the products we will develop must be explained and taught to our citizens. To sell these solutions will require a genuine partnership. It is our hope that this partnership will be formed and improved through the work on this first electronic commerce issue, the taxation of transactions. In that spirit, we have below
presented our reaction to the suggestions and recommendations you made in your proposal of
December 10. Please note that when reference is made to issues that may be difficult to
resolve in every state due to differing state constitutional requirements, remember that
our joint effort will likely lead to a solution in which the authority for a state to
receive expanded nexus authority will be offered only to those states which approve
simplified sales tax laws and regulations. In other words, the constitutional issues will
likely be problems that states will have to address rather than administrative problems
for remote sellers to deal with. 1. Tax Rates and Local Simplification
Issues In recent years, however, the technology and tax compliance software available to a wide range of sellers has improved greatly, and the ability to handle diverse rates has improved likewise. We believe it would benefit both parties to review this software fully to examine its cost, attributes, availability and capabilities as well as its impact on the actual compliance burden imposed by varying rates. While we are by no means ruling out the possibility of a "one rate per state" (or close approximation) solution, we believe we should first examine whether improvements in technology and software, coupled with some combination of a de minimis threshold, a safe harbor for firms using software certified by the states, and potential financial assistance, would constitute a viable alternative to the "one rate per state." We should be cognizant as well that some "one rate per state approaches" may bring in to play some state requirements for referenda on tax increases and the degree to which current revenues are pledged to the retirement of local government debt. Our goal, however, is the same -- simplifying the issue of varying local use tax rates. As to other local simplification
suggestions (particularly as it relates to locally administered sales taxes) we pledge to
work to reduce the burden of such situations. W need to be cognizant, however, that in
some cases this feature is the result of state constitutional provisions. In addition, we
are willing to explore the issue of minimizing the frequency of tax rate changes and
allowing sufficient lead time to implement such changes. Our initial reaction is that a
single annual change is unworkable; we would like to explore a quarterly option with some
allowance perhaps for uncollected tax due to rate changes. 2. Tax Base Issues Uniform definitions would be a significant although difficult step. We see two critical questions to be answered. Can we identify some relatively small number of important areas or categories of products or services in which uniformity of definitions are most important to work on first? We are almost certainly doomed to failure if we try to define the entire tax base for 46 sales tax jurisdictions. On the other hand, focusing on a small number of areas that are particularly important in electronic commerce could improve substantially the chances for success. Second, what can we use as the source of the definitions? Perhaps we can identify some reliable and consistent third party, such as the U.S. Department of Commerce or the Department of Treasury in its materials regarding Customs, to be the source for the definitions. Are there any classification schemes that are more reliable or more consistently used that could be chosen as a source for common definitions? Is there a source that could be used as a reference point for keeping definitions updated? Is there any understanding of how frequently such definitions would need to be updated from industry's perspective? We hope that as progress is made on other issues, such as rates and administrative requirements, that more attention can be paid to the tax base issue. In the category of services, there are issues that may be different than in goods, and intangible goods may pose additional or separate problems. Again, we welcome all suggestions.
The options developed should not be used to broaden the existing application of the sales
tax. That determination should be a separate consideration for any government.
Simplifications shouldn't be a cover for broadening of the tax base. 3. Administrative Issues Uniform registration return and remittance procedures and electronic filing are concepts that should be feasible to develop and implement. Assistance is needed from the industry in helping to clarify further the simplification needs in the areas of exemption documentation, audit procedures, appeal procedures, bad debt deductions and direct pay authority. With that assistance, these are areas that can be constructively addressed by the Project. Issues of filing frequency and collection allowances are certainly worthy of negotiation and discussion. Government members look forward to working
constructively with the Business members on the suggested administrative simplifications.
To help further that process, we have presented below some thoughts and options in certain
of the administrative areas identified by the Business community. In reviewing the
discussion, we ask that you view any specific "suggestions" as options the
Government members believe are responsive to the Business members and deserve further
discussion and elaboration to determine how they might be fleshed out and if they could be
accepted by both sides. The discussion should not be viewed a "negotiating
offer," but rather as "grist for the mill" of simplification and
uniformity. Registration, Returns and Remittances Registration. Sellers that would otherwise not be required to register with the state may accomplish registration for tax collection through submission of a single, uniform sales and use tax registration form. The form will be developed in consultation among states and sellers. Returns. Sellers may accomplish the filing of sales and use tax returns through one of the following means: (1) filing a uniform sales/use tax return in each state for which it is responsible for filing; (2) filing an electronic sales/use tax return directly (individually) with any state capable of accepting such return; or (3) filing a single electronic return for all states capable of accepting such returns with an entity that is responsible for subsequently providing the return data to each state. Remittances. Sellers may make payments of tax due through one of the following means: (1) making an electronic payment with any state directly; or (2) making a single electronic payment to an entity that is responsible for subsequently providing the return data to each state. Base State Arrangement: In lieu of the above, a "base state" arrangement could be developed where a seller would be responsible for registering with and filing returns and remittances with only their "base state," likely their state of commercial domicile. The returns and remittances would contain funds and data for all states into which the seller made sales (and tax collected at the rate(s) in the states into which the goods/services are delivered). The base state would then be responsible for providing information and remittances to all other states. This would effectively limit the seller to a single point of contact and filing. Comment: With the exception of the base state option, these proposals are similar to the recommendation of the Business group except that they provide for the ability to file electronic returns only with states capable of accepting such. At the present time, there are probably 10-12 states that can do so, but use of electronic filing is not widespread because software for taxpayers generally has not been developed. As an aside, the software generally has not been developed because there has been no assurance of a market. That is, states have not generally required electronic filing, and taxpayers have not sought that capacity. As to electronic payments, all but one sales tax state (I believe) requires electronic payments from larger sales taxpayers. The ability to generate a single payment to be broken into multiple remittances is not presently available, but could be developed relatively easily if accepted by the states. The "base state" option reflects the
current arrangement for the apportionment of fuel use taxes of interstate motor carriers
among the states in which the carrier travels. A key feature of that arrangement is that
the law, as it relates to covered vehicles and taxable consumption, is uniform from
state-to-state, but the rates do differ among jurisdictions. It should be noted that
states have found the administration of the fuel tax to be paper intensive under the base
state arrangement. They have taken steps to establish a central electronic clearinghouse
for the information provided by carriers, and about 18 jurisdictions use a central tax
return processing center developed by New York State. That is to say, that the base state
model is in certain respects migrating to a more centralized, electronic clearinghouse
approach. To the individual taxpayer, however, it operates as a base state program; only
for the state administration part is the central clearinghouse being developed. Filing Frequency. This a difficult issue because it affects the cash flow of states and localities and will be a point of comparison with current taxpayers. In all states, the frequency of remittance depends on the size (measured by annual tax liability) of the taxpayer. In most cases, larger taxpayers are required to remit on a monthly basis, but in several states (less than 6) there is a more frequent schedule. The cutoff for quarterly filing in most states is probably below $1,000 per month in liability which would approximate about $15-25,000 per month in sales volume. The attractiveness of a "monthly deposits with quarterly returns" system seems to depend on the choice made regarding the applicable tax rate, i.e., if tax is collected at only one rate per state, the actual return is not particularly complex. If on the other hand, there is a reporting for individual local jurisdictions, this system would provide more real benefit to a taxpayer. The frequency of remittance must also be viewed in
light of the decision regarding a collection allowance; i.e., if it is determined not to
provide a vendor collection allowance, the vendor might be compensated through a less
frequent remittance schedule. It should also be viewed in light of the choice made above
for filing returns, i.e., if a seller is filing a single "base state" return,
there could presumably be a more frequent filing requirement. Vendor Collection Allowance. Based on prior experience, this will be among the most difficult issues with which to deal for several reasons: (1) there is a philosophical belief among some that a vendor allowance is inappropriate; (2) the issue has been the subject of intense legislative discussion in many states and some "accommodation" has apparently been reached that will cause difficulties if disturbed; and (3) if an allowance is provided for any class of taxpayers, it is expected that all taxpayers will seek the same treatment; this substantially affects the revenue benefit gained from any agreement or legislation, depending on the group of sellers affected, the size of the allowance and the difference from current law in the state. In addition, it is not really a matter of simplification, but we do understand that it could help pay for the investment needed by sellers. Currently, 27 states allow a vendor allowance. In all but a few cases, the allowance is below (well below) the 3 percent flat allowance suggested by the business community. The median allowance rate is below 1.5 percent Often, the allowance is graduated to provide relatively greater benefit to smaller vendors, and about 1/2 of the states set a maximum annual or monthly allowance. Consideration of the level, if any, of a vendor
allowance should consider the frequency of the returns filed as well as the complexity of
the returns and other administrative aspects. Other Administrative Provisions Comment: As to documentation, it should
certainly be fruitful to engage in efforts to achieve uniformity in the documentation and
retention requirements for at least some types of common exemptions that are likely to
occur in an electronic commerce environment. This would include developing proposal for
uniform paper exemption certificates as well as a standard for electronic exemption
certificates. There may also be other "procedural" work necessary here once the
project is begun, but our proposal would seem to be a willingness to work on the area in
consultation with taxpayers. Some efforts in this area are already underway with the MTC
Uniform Resale Exemption Certificate as well as the work that has begun on the development
of an EDI standard for an exemption certificate. Uniform Audit Procedures. This proposal also
requires some further specification. Strict uniformity in procedures for conducting an
audit, in the absence of a uniform tax base and/or single audit, will be difficult to
achieve, but there are several other steps that could be taken. They include: (1) working
with taxpayers to develop "recommended" or "model" audit procedures
covering such areas as interviews, sampling, conferences, use of computer-assisted audits,
etc. that would promote consistency, but fall short of uniformity; (2) development of
procedures to reduce the numbers of audits and eliminate overlap in audits, (i.e.,
multiple states auditing the same period) through joint audits or base state audits
(depending on the degree of uniformity achieved in the tax base.) Uniform Bad Debt Deduction. This suggestion also
requires further clarification, given that in an electronic environment vendors should be
dealing with "guaranteed" forms of payment, i.e., credit cards, cybercash, etc.
It is one, however, that has been continually raised in the direct marketing context. In
those discussions, the states resisted this approach because of its impact on other
taxpayers. [About xx states currently offer a bad debt deduction.] They did, however,
agree to an "uncollectible allowance" or safe harbor for tax which could not be
collected from taxpayers. Uniform Direct Pay Procedures. While there is
considerable "business-to-business" electronic commerce and a number of
taxpayers desire direct pay authority for a variety of purposes, there is a need for
greater explanation in the context of the Project. There is currently an effort underway
in the EDI Audit and Legal Issues Task Force to look at the direct pay issue. States have
been surveyed as to their position on the matter (about 2/3 of the states offer direct pay
in some circumstances), and discussions have been held with taxpayers to determine the
nature of the issues and what approaches there are to resolving them. One of the major
issues in direct pay is local tax and how to situs transactions which might "go
away" in this context, depending on the determination made with respect to use tax
rates. Uniform Refund Procedures. This requires further
discussion, given that refunds in the sales tax context are not frequent, and there is the
very sticky issue of getting the refund to the actual "taxpayer" and not
unjustly enriching the seller. We should investigate this further since the concern may be
when tax is remitted to the wrong state or a transaction is sitused improperly rather than
actually being collected erroneously. There are likely procedures that could be developed
to deal the improper situsing, etc. Uniform Assessment and Appeal Procedures. Here again, there are opportunities to achieve greater uniformity and simplification for multistate taxpayers, but the issue needs to be dissected somewhat. For example, there is considerable merit in a uniform or minimum "protest period," i.e., the period following an assessment in which time a taxpayer may formally contest the assessment. Actual appeals procedures for taxes (sometimes including property taxes) are often identical so to carve out a special group would create a burden for states or cause a change for all other taxpayers. Also, some procedures are embedded in state constitutions. Conclusion
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