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States Move Closer to Streamlined Sales Tax; Show Independence by Decoupling from Some Federal Tax Rules(RIVERWOODS, ILL., January 2006) – If you are like millions of other shoppers, you probably bought at least a few items online over the holidays, with no sales tax being charged to you for your purchases. Now, it’s tax time and your state income tax return clearly asks you to declare any use tax (the buyer’s side of sales tax) that you didn’t pay at time of purchase. If you’re like most taxpayers, you’ll breeze by this – either because you haven’t kept track and, therefore, can’t even come close to determining it or, like pushing the speed limit, the risk of getting caught hasn’t outweighed the benefit yet. But, your tax-free surfing days may be numbered, as states officially begin enacting the Streamlined Sales and Use Tax Agreement, according to CCH, a Wolters Kluwer business and a leading provider of tax and accounting law information, software and services (tax.cchgroup.com). “The state sales and use tax rules date back to the 1930s and were designed to collect revenues from brick-and-mortar types of businesses,” said Daniel Schibley, JD, CCH state tax analyst. “States are looking to the Streamlined Agreement to start shoring back up the sales and use revenue base they have steadily been losing as more business is conducted over the Internet.” Under the Streamlined Sales and Use Tax Agreement, all member states will begin to apply the same sourcing rules, with the sales tax of the destination (not the point of sale) being applied to most sales. The 13 states where all of the Streamlined Agreement’s provisions currently are in force are Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota and West Virginia. Six more states – Arkansas, Nevada, Ohio, Tennessee, Utah and Wyoming – also have passed legislation that brings them toward compliance with the Agreement over the next few years. The states also are offering an olive branch to businesses that have not previously collected sales and use taxes in their state. If these businesses register with the state and begin collecting the tax under the destination-based rules and meet some additional requirements, they’ll receive amnesty for past uncollected taxes. “Historically, based on the Supreme Court ruling in Quill Corp. v. North Dakota, businesses have been able to avoid collecting sales and use tax if they didn’t have a physical presence in the state. This is how many online retailers have avoided collecting the tax,” said Schibley. “However, there are some sellers that are considered to have ‘gray nexus,’ such as some online affiliates of traditional retail stores. The online retailers may be able to reasonably argue they don’t have a physical presence while a state could just as reasonably argue they do. Rather than risk losing the argument and being assessed past uncollected taxes, the online retailer can now decide to begin collecting the tax without being penalized for not doing so in the past.” While the Streamlined Sales and Use Tax Agreement today is focused on encouraging voluntary compliance by businesses, the states ultimately have their eye on convincing Congress that state tax laws in the Streamlined member states have become simplified enough to require out-of-state sellers to collect tax on purchases sent to those states even if the seller has no physical presence there. Legislation to do just that was introduced in the U.S. Senate last month. “Part of the reason the Quill case stipulated that there had to be a physical presence before a state could assert sales and use tax nexus is because at that time the Court felt that it would just be too hard for sellers to collect sales and use taxes for a multitude of different jurisdictions given the complexity of state and local tax rules,” Schibley noted. “But the Court also made it clear that Congress was in charge of interstate commerce and could act to eliminate the physical presence requirement if they chose. Through the streamlining initiatives, states are getting themselves in position to try to persuade Congress to do this.” Note: See CCH Tax Briefing: Streamlined Agreement Takes Effect, included in the CCH Whole Ball of Tax package, for further analysis of this initiative. States Break from Federal Tax Rules for Manufacturing and Sales TaxWhile many states would like to see Congress act to allow universal sales and use tax collection, states aren’t always in agreement when it comes to federal tax rules. Two major areas of contention have been the federal deduction for manufacturers and sales tax deduction for individual taxpayers that were part of the American Jobs Creation Act of 2004 (AJCA). On the corporate side, 20 states have now decoupled completely or partially from an AJCA provision phasing in a tax break for domestic manufacturers. The deduction –which will equal 9 percent of qualified income when it is fully phased-in in 2010 and which is estimated to cost about $76 billion at the federal level – is the most expensive provision of the AJCA and also would be costly to states conforming to federal tax law. The federal law also broadly defines manufacturers to include several areas outside of traditional manufacturing as well as the underlying “production activities” associated with manufacturing. Those states giving the thumbs down to the rule and requiring manufacturers to add back in all or part of the federal break in determining their state tax bill are: Arkansas, California, Georgia, Hawaii, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Hampshire, New Jersey, North Carolina, North Dakota, Oregon, South Carolina, Tennessee, Texas and West Virginia. “While states generally are not in as bad of a revenue position as they’ve been in the past few years, there’s still a lot of long-term uncertainty about the economy,” said CCH Senior State Tax Analyst John Logan, JD. “Meanwhile, many states have mounting Medicare and state pension funds that they need to pay and they have already made large corporate tax concessions to attract and retain businesses. So they’re reluctant to continue to strain their business tax revenue base.” On the personal income tax side, taxpayers who take itemized deductions have the choice (thanks also to AJCA) to decide whether to choose to deduct their state sales tax rather than their state and local income tax on their federal return. The sales tax deduction at the federal level is available not just to individuals living in states without a personal income tax, but also to taxpayers in other states who find their sales tax liability is greater than their state income tax liability, for example, because they bought a single big-ticket item or a series of items. States, however, have the option of deciding whether to go along with the federal deduction for state sales tax or decouple, and many states are marching to their own drum by not allowing taxpayers to take the sales tax deduction on their state return. The choice is not an issue in those states that do not have state income tax or in states such as Illinois or Ohio that base their state income tax on federal adjusted gross income where federal itemized deductions are not factored into computations for arriving at state income tax owed. However, some states have taxpayers determine state taxes starting with federal taxable income, which includes federal itemized deductions in the figure used to compute state taxes. Among states that do this, but are requiring the federal deductions be added back in for computing the state sales taxes, are California, Kentucky, Maine, Mississippi, Oregon and North Carolina. “This is one of the provisions that was only enacted for 2004 and 2005 tax years,” said Logan. “Congress will need to take further action if it wants to allow taxpayers the option of deducting state sales tax at the federal level in the future, although the states can continue to decouple as they see fit.” About CCH, a Wolters Kluwer businessCCH, a Wolters Kluwer business (tax.cchgroup.com) is a leading provider of tax, audit and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager™ and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. -- ### -- nb-06-14
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