All States --Sales and Use Tax: SST Task Force Develops Consensus on Small Seller Threshold and Vendor Compensation

A consensus began to emerge concerning a small seller threshold and mandatory vendor compensation under the Streamlined Sales and Use Tax (SST) Agreement during a meeting of the SST Small Seller Task Force on November 13, 2008, in Rosemont, Illinois. The task force, chaired by Harley Duncan of KPMG, was appointed by the SST Governing Board and charged with examining these related areas. The task force's goal is to reach a consensus on as many points as possible and to report its findings to the Board, which hopes to refine and adopt any conclusions.

 Requirements in Federal Legislation

A small seller threshold would relieve sellers falling under the threshold from a requirement to collect sales tax on remote sales for member states. Currently, the Agreement does not include a small seller threshold. It also does not mandate vendor compensation to cover the costs of collecting tax. However, both of these have been required elements in the various federal bills, which have been introduced in the last few sessions of Congress, that would confer collection authority on states over remote sales in return for enacting specified reforms.

Kansas Commissioner Joan Wagnon told the task force that the principal backers of the federal legislation, Sen. Mike Enzi, R-Wyo., and William Delahunt, D-Mass., have agreed to modify the requirement in the bills they plan to reintroduce in January. The new bills will not specify a dollar figure for a small seller threshold, as they have in the past, but instead will require that the Governing Board designate a threshold. The Board will then be able to adjust this threshold over time as developments warrant. The federal bills will continue to require "reasonable compensation" to cover the costs of collection. Wagnon said that the Board is looking to the task force to provide the basic principles that the Board will use in making its determination in these areas. She said that the states need to get organized now because, once federal authorizing legislation is enacted, "the states will be drinking out of a fire hose."

 Small Seller Threshold

The preference of most of the assembled business and state representatives was for a low small seller threshold (i.e., relatively few sellers would be excused from collecting) that would be offset by a high level of vendor compensation and access to technological assistance. Duncan summarized the apparent consensus reached during the meeting concerning a threshold as follows:

-- A threshold is desirable.

-- The preference is for a lower threshold.

-- Further work in technology, additional simplifications, improved communications, and increased compensation are needed to justify a low threshold.

-- The "lookback" period that will determine whether a seller falls below the threshold needs to be specified and time will have to be provided once the threshold is crossed before compliance can be mandated.

-- A threshold that blends both a dollar figure of sales with the number of transactions can be implemented over time as progress is made in other areas.

-- Gross, remote, "consolidated" sales by the seller would be the standard used in evaluating whether the threshold has been crossed, regardless of whether the sales were "taxable" or not, and no separate state-specific threshold would be used.

 Vendor Compensation

Several participants commented that tying the level of vendor compensation to the complexity of a state's system (i.e., mandating a higher level of compensation for a state with a system that imposes higher collection costs) would offer an incentive for states to make their systems less complex. It would allow, for example, administrators to show legislators that enacting simplifications could result in lower rates of vendor compensation that would offset potential losses in revenue resulting from the simplifications. However, other participants warned that big states that are not currently SST member states could be discouraged from joining because their systems tend to be more complex and, thus, would require higher rates of vendor compensation under the proposed guidelines. Duncan summarized the emerging consensus in this area as follows:

-- The vendor compensation offered should recognize differences in the size of the sellers but use graduated rates, rather than caps, to do so.

-- An attempt should be made to fully compensate sellers for costs, such as credit card fees on the tax component of the purchase price, that are exclusively attributable to collection responsibility.

-- There is no need to recognize differences between nexus and non-nexus sellers.

-- Vendor compensation should reflect the complexity of different sales tax structures.

-- Compensation provided by the states to certified service providers (CSPs) should offset a portion of the compensation received by sellers using CSPs.

Several participants urged the group to use the Joint Cost of Collection Study, which was prepared for the Board by PricewaterhouseCoopers, as a benchmark to use in setting levels of vendor compensation and as a source to categorize systems by their level of complexity. Some urged that the study be updated, since it was completed before the SST system was implemented.

 Upcoming Meetings

The task force plans to hold a conference call on December 2, in anticipation of its next in-person meeting later that week in Providence, Rhode Island, on December 5, which will be held in conjunction with the Board's upcoming session.

Streamlined Sales Tax Small Seller Task Force, Rosemont, Illinois, November 13, 2008

Minnesota --Multiple Taxes: Constitutional Challenge to JOBZ Program Dismissed

A constitutional challenge brought by a group of Minnesota taxpayers against the Job Opportunity Building Zones Program (JOBZ), which provides a number of corporate income, personal income, sales and use, and property tax incentives, was dismissed for lack of standing. The taxpayers included business owners who claimed the program resulted in them being subjected to a non-uniform tax burden and Minnesota companies that claimed the program put them at a competitive disadvantage. The court, however, concluded that all the taxpayers lacked standing because they failed to demonstrate injuries in fact that were special or peculiar and different from damage or injury sustained by the general public.

The business owners lacked standing because an increased tax burden by itself was insufficient to confer standing and the owners failed to provide evidence that the tax incentives included in the JOBZ program resulted in them suffering a quantifiable economic injury, such as a loss of salary or profits.

Each business asserted that it had direct competitors that were in the JOBZ program and that the tax incentives offered by the program placed it at a competitive disadvantage because without the overhead imposed by taxes, competitors were able to charge lower prices. The court, however, held that the businesses' status as competitors was insufficient to confer standing without a violation of their procedural rights, such as the right to notice, or evidence of a distinct injury to their business. Although the businesses asserted that the tax benefits were connected to a reduction in their profits, the court found the assertion illusory because the businesses failed to provide evidence of lower profits. In addition, the court found that the economic disadvantages the businesses complained of was not an interest the JOBZ statute was enacted to protect because it was created to combat the economic disadvantages of operating a business in economically distressed areas of rural Minnesota.

Subscribers to CCH Tax Research NetWork can view the decision.

Interstate Motor Trucks, Inc. v. Minnesota, Minnesota District Court, Second Judicial District, No. 62-CV-07-845, October 10, 2008