Tennessee and the Streamlined Sales Tax Project (SSTP)

Presented to the TACIRNashville, Tennessee

February 7,2011

By Stanley Chervin, Senior Research Associate

Inability to Require Remote Sellers to Collect Sales Tax

• National Bellas Hess Inc. v. Illinois Department of Revenue (1967)

• Quill Corporation v. North Dakota (1992)

Result: Without a physical presence in a state or “nexus,” states have no legal authority to required remote sellers to collect state or local sales taxes.

Inability to effectively collect Tennessee Use Tax from households and some businesses

• The Use tax complements the Sales tax (1947 for both) in order to ensure collection of the tax on merchandise purchased from out-of-state sellers who do not collect the sales tax.

• In such cases, the buyer has a legal responsibility to remit the tax to the Department of Revenue. The Department of Revenue provides a consumer use tax form (SLS 452) that households and businesses can use to report and pay any use tax due.

• While many Tennessee businesses are audited each year to insure proper payment of both the sales and use tax, many unaudited businesses and most households for obvious reasons are not.

• In 2009, individuals filed 1,376 use tax returns and paid $1,746,111.

TENNESSEE AND THE SSTP• States invited to work together by the NCSL, NGA, FTA,

and MTC to work together to simplify sales taxes.• Organized in 1999 & 2000 with participation by 44

states and the District of Columbia. • Participating states called SSTIS (Streamlined Sales and

Use Tax Implementing States).• Tennessee played an active role in the development of

the SSTP including leadership roles in the Streamlined Sales Tax Project Governing Board.

• Its active role reflects a combination of leadership decisions to participate in the project and some very obvious but sometimes overlooked or forgotten fiscal realities.

Greatest Combined State and Local Tax Dependence On General Sales Taxes (2008 Census

Data)

1 Tennessee 46.3%2 South Dakota

40.1%3 Arizona 39.6%4 Louisiana 39.6%5 Arkansas 39.5%6 Hawaii 38.9%7 New Mexico 35.7%

U. S. Census data adjusted

Highest combined average state and local sales tax rate: 9.41%

4Q99 4Q00 4Q01 4Q202 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q090.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

E-Commerce Sales as Percent of Total Retail Sales

Quarter and Year

% o

f Tot

al R

etai

l

Source: U. S. Census

Source: U.S. Census:, QUARTERLY RETAIL E-COMMERCE SALES 3rd QUARTER 2010

Growth in Remote Sales

1. State and local sales tax revenue loss for all states is estimated at $11.4 billion by 2012.

2. Projected 2012 state and local sales tax loss for Tennessee is estimated at $410.8 million.

3. Total loss for Tennessee between 2007 and 2012 is estimated at $ 1.9 billion.

4. Estimated 2007 losses in Tennessee represent 3.04% of actual 2007 state and local sales taxes, fifth highest of the 47 states (includes DC) analyzed. Budgetary impact (of the loss) in Tennessee forecasted to rise to 4.8% of actual collections by 2012.

Significant Lost Revenue From E-Commerce Only

Source: Bruce, Fox, and Luna: State and Local Government Sales Tax Revenue Losses from Electronic Commerce, April 2009.

1. State and local sales tax revenue losses for all states is estimated to reach $23.3 billion by 2012.

2. Projected 2012 state and local sales tax loss for Tennessee is $748.5 million.

Estimated Losses from all Untaxed Sales (E-Commerce plus other types of

remote sales)

Source: NCSL interactive map at http://www.ncsl.org/default.aspx?tabid=20274

SSTP Goals• State level administration of sales and use tax

collections.• Uniformity in the state and local tax bases.• Uniformity of major tax base definitions.• Central, electronic registration system for all

member states.• Simplification of state and local tax rates.• Uniform sourcing rules for all taxable

transactions.Source: SST Governing Board website: http://www.streamlinedsalestax.org/index.php?page=About-Us

SSTP Goals

• Simplified administration of exemptions.• Simplified tax returns.• Simplification of tax remittances.• Protection of consumer privacy.

Source: SST Governing Board website: http://www.streamlinedsalestax.org/index.php?page=About-Us

SSUTA Conformity Requirements

• Common state and local sales tax base within a state (over 30 states impose both state and local sales taxes)

• A single state rate (few exceptions such as food)

• A single local rate in each jurisdiction (easily mapped)

• Uniform destination sourcing rule for goods and services but with an alternative for intrastate sourcing under certain conditions

SSUTA Conformity Requirements

• Uniform sourcing for telecommunications• Uniform product definitions• Reasonable vendor compensation (a clear

requirement in seeking federal legislation)

AK

HI

RI

VT

NH

MANY

CT

PA

NJ

MDDE

VAWV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MNND

SD

NE

NMAZ

COUT

WY

MT

WA

OR

ID

NV

CA

DC

Streamlined State Status 01-01-11

Full Member States

Associate Member States – flex to full

Advisory States – Not Conforming

Non-sales tax states

Non-participating state

Source: Streamlined Sales Tax Governing Board

Project states – Not Advisory

ME

Tennessee Conformity Changes

• Adoption of most conforming definitions.• Creation of a jurisdiction boundary database (for use

by remote sellers for establishing local sales tax rate).• Establishing a central registration system.• Telecommunication sourcing rules.• Uniform remittance and recovery of bad debt

procedures.• Providing SSUTA amnesty provisions.• Uniform sales tax holiday definitions and procedures.

Tennessee Hurdles to Full Conformity• Destination sourcing rule needs to be readdressed in

Tennessee. Optional origin sourcing now available under certain circumstances.

• Single article limitation (local and state) must be ended (not allowed under SSUTA except for motor vehicles, watercraft, aircraft, and modular, manufactured and mobile homes).

• Special sales tax rates (different than standard rate) levied on a small group of items in Tennessee must be repealed. These will be replaced with special privilege taxes (in lieu of sales taxes).

Tennessee Hurdles to Full Conformity

• Uniform sourcing rules for telecommunication service will result in some redistribution of local sales taxes; actually back to method used in late 1990s.

• Vendor’s Compensation must be provided to both remote and instate vendors.

• Additional taxpayer education by DOR needed before full implementation.

Congressional Hurdles Remaining• Congress facing significantly more important

issues at current time. New composition of Congress may frown on what some consider a tax increase.

• Congressional interest and involvement must be maintained, and this will require continued momentum by the SSTP.

• Issue of appropriate level of vendor’s compensation and deminimus rule amount, although both issues recently addressed in SSUTA, must satisfy Congress.