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Also, the 2006 CCH Whole Ball of Tax is available in print. Please
contact:
Leslie Bonacum
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mediahelp@cch.com
Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com
Link to special CCH Tax Briefings on key topics from 2005:
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2006 CCH Whole Ball of Tax
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 Tax
While 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 business
CCH, 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.
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