The U.S. Supreme Court’s landmark decision opening the door for states to tax transactions by out-of-state merchants suggested a path for states to achieve sales tax uniformity and ease undue burdens on sellers.
But it isn’t a popular path—and that probably won’t change in 2019.
The 23-state Streamlined Sales and Use Tax Agreement—launched in 2000 to simplify sales tax administration and minimize the burden of tax compliance—has failed to attract a single new member in the seven months following the landmark South Dakota v. Wayfair decision. Indeed, not a single state has joined the compact since 2014. This lack of action seems to defy the supportive words of Justice Anthony Kennedy, who touted the pact as a strategy for uniformity in his Wayfair opinion.
Legislative sessions kicking off across the country this month could generate new interest in the SSUTA, but tax practitioners interviewed by Bloomberg Tax expect few changes in the 27 states and the District of Columbia that have all resisted the Streamlined project since it launched 19 years ago.
“The fact that it’s been seven or eight months without any action makes me think there are other things going on,” said Jamie Yesnowitz, a principal and state and local tax practice and national tax office leader at Grant Thornton LLP. “There are some institutional barriers for states—particularly the larger states—to joining the SSUTA. These states want the flexibility of implementing and taxing sales on their own terms rather than signing up for an agreement with certain procedures.”
Loren Chumley, a principal in the State and Local Tax practice at KPMG LLP, said the states appear more interested in the revenue possibilities posed by Wayfair than uniformity.
“We’re seeing a very significant amount of activity—policy changes around maintaining collections from remote sellers and marketplaces,” said Chumley, a former Tennessee revenue commissioner. “But we’re not really seeing states making changes to the policy requirements highlighted under the Streamlined Sales and Use Tax Agreement, and that’s a little concerning to me.”
Even the most optimistic assessment suggests the SSUTA’s prospects for expansion would mean the addition of just one state during 2019, with Missouri and Tennessee mentioned as possibilities. Tennessee is the lone associate member of the SSUTA. Missouri lawmakers discussed membership last year in the context of a broader tax reform measure, but the SSUTA-specific provisions never passed.
“I hope we can get one or two new full member states. That may be very optimistic, but it is still a hope and not an impossibility. It’s a lot of work for a state to commit,” said Frederick Nicely, senior tax counsel for the Council On State Taxation and member of SSUTA’s Business Advisory Council.
Wayfair replaced the physical presence threshold for when states could tax remote sales decided in Quill Corp. v. North Dakota and adopted an economic nexus standard based on the amount of business done in a state. The majority in the 5-4 ruling suggested strongly that South Dakota’s law requiring remote sellers that meet thresholds of $100,000 in annual in-state sales or 200 transactions to collect and remit sales tax, would pass constitutional muster.
Hopes for wider participation in the SSUTA brightened last summer based on Justice Kennedy’s affirming comments. Kennedy said South Dakota’s law would likely survive a commerce clause challenge based on its small business safe harbor, lack of retroactivity, and conformity with the SSUTA, which “standardizes taxes to reduce administrative and compliance costs.”
State Tax Code Complexity
But Kennedy’s words likely had little impact on the states that have shunned the agreement, said Richard Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law and an authority on state and local taxation.
The nonmember states have high degrees of tax code complexity that will probably never move them into the SSUTA camp, Pomp said. Key problems for the non-SSUTA states include requirements for state-level tax administration, uniform definitions of products and services, simplified tax rate structures, access to sales tax administration software paid for by the state, and immunity from audit liability.
Adopting the SSUTA would also trigger potentially stressful revenue and political problems in the nonmember states.
“These larger states have well-organized and substantial groups of lobbyists protecting their constituents from the changes that would be mandated by the agreement,” Pomp said. “A state like Texas, for example, has more than 100 sales tax definitions that would have to be changed if it were to adopt the agreement. I do not expect to see a rash of adoptions in order to receive Wayfair’s blessing.”
Pomp added that the nonmember states interpret Kennedy’s words as a mere summary of statutory features easing undue burdens on remote sellers, and not a list of requirements. Of course, that view could change if remote sellers begin filing commerce clause challenges to state tax regimes. It’s a risk the states are willing to take.
“I think people feel that if you have a reasonable threshold and you aren’t going retroactive, you are going to be okay. Streamlined was just icing on the cake, and Kennedy probably didn’t even know what the project was about at a granular level,” Pomp said.
‘A Screeching Halt’
Susan Bittick, a principal at Ryan LLC, agreed and noted the SSUTA had “come to a screeching halt” years before the Wayfair case ascended to the Supreme Court. She said the case was driven in part by nonconforming states hoping to bless the concept of “economic nexus” as an alternative to the SSUTA.
“The court didn’t say you have to join,” Bittick said. “So there are states out there that look at that and say ‘we’ll get as much uniformity as we politically can do in our state and take advantage of those economic nexus rules the court has blessed, and see what happens.’ “
Pushing Past the Cynicism
The leadership of the SSUTA is nonetheless pushing past any cynicism among the 27 nonmember states and the District of Columbia.
Dan Noble, the immediate past president of the Streamlined Sales Tax Governing Board Inc.—which administers the agreement—and director of the Wyoming Department of Revenue, said the group has held discussions with more than a dozen nonmember states in the aftermath of Wayfair. SSUTA leadership remains hopeful about membership growth but also understands the hesitancy keeping nonmembers sitting on the fence.
In December 2018, the SSTGB published an updated guide for nonmember states. The document serves as a high-level overview, outlining the SSUTA requirements and the procedural steps states must take to join.
The SSTGB is also exploring options for some states to participate in streamlined processes without becoming full members. For instance, the board is looking at wider options for nonmembers to participate in the Streamlined Sales Tax Registration System, a mechanism for sellers to register and collect tax in all SSUTA states. Noble said this could be accomplished through wider use of associate and contingent memberships, which permit lower levels of SSUTA conformity.
The governing board is also looking at additional options for nonmembers to use Certified Service Providers. The providers are outside agents certified under the SSUTA that permit remote sellers to outsource most sales tax administration responsibilities.
“Obviously we’d love to have more members,” Noble told Bloomberg Tax. “But if they can’t become members, we’ve discussed becoming involved in the centralized registration system or potentially contracting with our certified service provider networks, and we’re trying to work something like that out.”
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