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Article Excerpt
INTRODUCTION
The technological advances of the last several decades may have greater implications for the sales tax than for any other tax imposed in the U.S. The implications go far beyond how taxes are administered and complied with to include such things as changes in the form and types of intermediate and final products that are purchased and the ways in which these products are distributed. Both the private and public sectors are struggling to accommodate the sales tax, which owes its heritage primarily to the 1930s' environment of mom-and-pop stores selling tangible goods, to today's modern business environment and the shift towards services and intangible products. Tax is often uncollected on rapidly growing mail-order and online sales, and new types of products, such as electronically delivered movies and music and various telecommunications services, pose new sourcing and tax-enforcement issues. Advances in technology create new problems, but also may provide businesses and governments with the tools to solve them. This paper focuses on one aspect of this evolving puzzle--how recent technological advances affect compliance and administration. Further, we examine the implications of this changing environment for the vendors tasked with the burden of collecting and remitting sales and use taxes and the state and local governments that assess them. (1) In analyzing this puzzle, the emphasis is on how technologies can operate through developments in the Streamlined Sales Tax Project (SSTP) to enhance administration and compliance.
The paper is divided into four sections after this introduction. The first section briefly summarizes the sales tax structure and current compliance costs and practices. The second section describes the SSTP, the way it influences compliance and administration, and the outlook for the SSTP. The third section examines how economic efficiency and tax revenues are likely to be affected by technology and the SSTP. The final section is a brief conclusion.
U.S. SALES TAXES
Structure, Complexity and E-Commerce
The share of state taxes generated by the sales tax has been largely stable at just over 32 percent since the mid-1980s, leaving the sales tax just below the individual income tax in its contribution to state finance. (2) State sales tax revenues have declined slightly from their peak of about 1.84 percent of GDP in 1996 to 1.75 percent in 2007, although rates rose steadily during that period. Base erosion has taken place because of the growth of often untaxed services and electronic commerce, and expanding legislated exemptions. Forty-five states and the District of Columbia (D.C.) impose sales taxes, which is more than the 41 states and D.C. that levy the personal income tax. Local governments in 35 states also impose sales taxes, but the tax is a very distant second to the property tax and only raised 11.2 percent of local tax revenues in 2005. (3)
Wide variation exists in the structure and operation of sales taxes across U.S. states (see Due and Mikesell (1994)), which creates compliance challenges especially for multistate firms. Thus, the potential for technology to lessen the complications that arise from imposing such a non-uniform tax is certainly appealing. Sales taxes vary according to basic legislative structures, with some states levying the tax on purchases by individuals, some levying it on vendors' gross receipts and others using a combination of these two approaches. Similarly, breadth of the base, tax rates, (4) filing requirements and nearly every other aspect of the structure varies significantly across states. All states impose a use tax on items purchased out of state for use in the state and on items purchased for exempt purposes that are later changed to taxable purposes, though the specific details of use taxes vary. (5)
As a general rule, goods are broadly taxed and a relatively narrow set of services is taxed, though there are dramatic differences, with some states, such as Hawaii and New Mexico, taxing nearly all services, and others, such as Illinois and Rhode Island, taxing very few. (6) New business exemptions are commonly offered by the states, as are exemptions for consumer purchases. Food for consumption at home has been one area of relief for individuals. Thirty states now offer a complete food exemption, though with many definitional differences as to what constitutes food, and seven states tax food at a rate below the general rate. Sales tax holidays have been a particularly frequent set of recent exemptions, creating unique compliance problems for firms. Sixteen states and the District of Columbia offered sales tax holidays during 2008. (7) All of these factors complicate the structure of the sales tax and raise the costs of compliance, especially for firms with a multistate presence.
E-commerce has aggravated the initial remote sales problem created by mail order transactions. E-commerce continues to expand very rapidly and is estimated to have totaled $2.40 trillion in 2006, including all sales by manufacturers, wholesalers, service providers and retailers, or 12.5 percent of all such sales. (8) Many discussions of taxation of e-commerce focus on sales by retailers, which were only $136 billion in 2007. (9) However, consumers may purchase from non-retail vendors, and many business-to-business purchases are taxable, so the broader measure of all e--commerce sales is a better indicator of the direction and magnitude of e--commerce and its implications for the sales tax. Evasion and avoidance through e--commerce are likely smaller problems than had originally been anticipated because of the greater propensity of major multi-channel retailers, relative to pure e-commerce players, to make online sales and because many firms have been more prone to voluntarily comply or to accept that they have nexus rather than litigate over the question. (10) Still, the losses from untaxed e--commerce sales are large and growing, and by one measure equaled $14 billion, or nearly five percent of total sales tax collections in 2006. (11)
Technology can play only a limited role in lessening tax base erosion and in many ways may exacerbate base erosion. Technology does nothing to lessen the political forces leading to new exemptions, and probably gives taxpayers arguments for additional economic development exemptions because of the ability of out-of-state vendors to deliver an increasing number of goods and services remotely. Similarly, technology is expanding the set of potentially nontaxable transactions, many of which may not be in the legislated tax base either because they are digital services or products or because they were never anticipated by state legislatures. Thus, technology is likely to accelerate shifts from taxable goods to nontaxable transactions. Technology may also facilitate noncompliance, such as through the fraudulent use of sales suppression software that facilitates sales understatement, but also by facilitating often untaxed digital transactions. At the same time, technological and communications advances can dramatically reduce some of the costs of compliance and may yield cost savings to revenue agencies as well. These advances have taken place largely independent of the sales tax streamlining initiative.
Firm Compliance Process
The sales and use tax compliance issues facing multi-state vendors are significant given the disparity in structure and administrative procedures across states and localities. Table 1 provides a brief overview of the steps involved in the sales tax compliance process and shows how technology and streamlining might affect this process. A comprehensive review of all difficulties lies beyond this paper, but examples are given to illustrate the many complexities in each step of the compliance process. Further discussion of each item follows.
Situs the Transaction
Direct purchases of goods and services have generally been sitused on a point-of-purchase basis, which in many instances coincides with the appropriate situs under a destination-based sales tax. Exceptions include purchases by exempt buyers (see below) and nonresidents (i.e., cross-border shoppers). In the latter case, the principle of destination taxation is violated.
Situsing of remote sales has traditionally been made using the five-digit zip code and, more recently, a nine-digit zip code. However, zip codes do not accurately correspond to local taxing jurisdictions and have been the subject of several class action lawsuits. Digitized products have been an issue because determining the location of use is difficult for a product that can be so easily transferred from computer to computer, or stored in one location, but accessed from many other points.
Determine Whether Firm Has Nexus
Nexus requires retailers to have some form of physical presence in the taxing jurisdiction. Beyond this general statement, practice has varied across time and across states. Some states have pushed the nexus envelope to draw more firms into the tax net using broad approaches such as economic nexus, affiliate nexus and agency nexus. For example, a retailer may be deemed to have nexus if the firm has significant economic presence (without physical presence) (12) and one of the firm's affiliates or agents has physical presence in the taxing jurisdiction and performs certain tasks on behalf of the business. The different and evolving nexus standards have created uncertainty if not anxiety on the part of retailers because of the risk of audit and assessment of back taxes should they be retroactively assigned nexus in a legal proceeding.
Determine Which Transactions Are Taxable
Goods are generally taxable, but states grant a...
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