The Political Economy of the Streamlined Sales and Use Tax Agreement

Antecedents to the Streamlining Movement: Groping for Consensus As noted above, the origins of the SSTP lie in the intense and widespread interest in state taxation of electronic commerc

The Political Economy of the Streamlined Sales and Use Tax Agreement

John SwainJames E Rogers College of LawUniversity of ArizonaTucson, AZ

Walter HellersteinUniversity of Georgia Law School

Athens, GA

I Introduction

The sales tax streamlining movement may well be the most significant

development in state sales taxation since the genesis of the state sales tax in the 1930s as

“a desperation measure” to make up for plummeting income and property tax revenues.1 Though states have increasingly relied on the sales tax as a major (if not the most

important) source of revenue,2 the structural flaws in the tax—present since its inception

—are increasingly highlighted by an ever expanding global, service-oriented, and digital economy Preeminent among these flaws, at least from the standpoint of constitutional law, had been the complexity of compliance with a multiplicity of non-uniform state and local sales tax regimes This shortcoming has prompted the U.S Supreme Court to hold

2 The general sales tax vies with the personal income tax as the leading source of state tax revenue.

It was the leading source of state tax revenue during the mid–1990s, fell to second place during the booming economy of the late 1990s, and was in a virtual dead heat with the personal income tax in 2004

See JEROME R H ELLERSTEIN & W ALTER H ELLERSTEIN , S TATE AND L OCAL T AXATION 3 (8 th ed 2005) In

2004, the state sales tax yielded $194.2 billion, or 33.4 percent of the total of state revenues U.S Census Bureau, National Totals of State Tax Revenue by Type of Tax, available at

http://www.census.gov/govs/qtax/table2.txt The figures are for the twelve-month period ending June 2004.

on two separate occasions that the tax is an unconstitutional burden on interstate

commerce as applied to sellers without an in-state physical presence (hereinafter

sometimes referred to as “remote sellers”).3

Though the de facto exemption for remote sellers was a major thorn in the side of state tax authorities (and non-remote retailers) for at least the past four decades, states showed little if any willingness to adopt more uniform rules until the Internet exploded onto the scene While investors were seized by a frenzy of optimism over the potential for electronic commerce and Internet retailing, state tax authorities and brick and mortar retailers saw a surge in remote selling as an imminent and possibly mortal threat Historyteaches us that crises, however dangerous, are moments of great opportunity.4 The streamlining movement bears witness to this truism, as we explain in greater detail below

This paper has four major objectives The first is to identify the tax policy

underpinnings of streamlining as well as the political and economic forces that spawned the initial streamlining movement The second is to describe the antecedents to

streamlining, the Streamlined Sales Tax Project (SSTP), and the agreement that the SSTPproduced (the Streamlined Sales and Use Tax Agreement or SSUTA) The third is to examine how political and economic forces have shaped, and continue to shape, the streamlining movement The fourth is to explore whether and how streamlining, or the

3 National Bellas Hess, Inc v Department of Revenue, 386 U.S 753 (1967) (holding that both the Due Process Clause and Commerce Clause require that a remote seller be physically present in order for a state to impose a use tax collection obligation); Quill Corp v North Dakota, 504 U.S 298 (affirming the

Bellas Hess Commerce Clause holding but finding that there is no due process bar to imposing a use tax

collection obligation on remote sellers that purposefully avail themselves of benefits provided by the state).

4 It is also said that the Chinese character for crisis constitutes a combination of the characters for

danger and opportunity See, e.g., LaShawn A v Kelly, 887 F Supp 297, 317 (D.D.C 1995) (“At the

time of the Cuban missile crisis, President John F Kennedy noted that the Chinese character for crisis is a composite of two other characters meaning ‘danger’ and ‘opportunity.’”) Whether or not this proposition

is true from a linguistic standpoint, see “Myths About the Chinese Language,”available at

www.webcom.com/~bamboo/chinese/myths.html, it retains its force as a valuable insight

lessons learned from streamlining, might serve as a platform or template for more

fundamental sales tax reform Because the SSTP is still a work in progress, some of the discussion in this paper must necessarily be regarded as preliminary Nevertheless, because of the enormous potential significance of the SSTP, we welcome the opportunity

to undertake a general—if somewhat tentative—exploration of the political economy of streamlining

II The Flaws in the Existing Retail Sales Tax and the Impetus to Reform

Most experts agree that a normative tax system should be equitable, economicallyefficient, and administrable, although there may be variations on the precise way in which these goals are formulated.5 The existing retail sales tax falls far short of each of these normative goals The levy offends both equity and efficiency criteria by its

overinclusiveness in taxing many business purchases and its underinclusiveness in excluding housing, intangible property, and services The inclusion of business

purchases causes the effective tax rate on household consumption to pyramid, and

because different products and production methods have varying levels of taxable inputs, effective tax rates on household consumption vary arbitrarily (inequitably) and distort consumer decision-making Similarly, the general failure to include services, housing, and intangibles within the sales tax base arbitrarily favors these forms of consumption

The existing system also offends the goal of administrability The existence of 46independent state-level taxing regimes, along with more than 7,500 local taxing

5 See, e.g., RICHARD W T RESCH , P UBLIC F INANCE : A N ORMATIVE T HEORY 332-33 (2d ed 2002);

J OHN L M IKESELL , F ISCAL A DMINISTRATION : A NALYSIS AND A PPLICATIONS FOR THE P UBLIC S ECTOR

278 (4th ed 1995).

jurisdictions, has created a patchwork of rules of substantive tax liability6 and tax

administration that can make compliance a nightmare for the multistate vendor The U.S.Supreme Court has reacted to this quagmire of different and often-conflicting state and local tax rules by articulating and reaffirming a nexus rule that relieves out-of-state vendors of use tax collection responsibilities in states in which they lack a physical presence.7 As a consequence, sales by remote vendors enjoy a de facto immunity from taxation, even though such purchases are frequently subject to use tax, because

nonbusiness purchasers rarely remit the tax for which they are liable Thus, the Court’s remedy for the sale tax’s administrative shortcomings has rendered the tax even more inequitable and distortive by giving out-of-state merchants a competitive advantage over local merchants

These structural flaws are highlighted and exacerbated by secular economic trends Indeed, the retail sales tax in its current form is peculiarly unsuited to an

increasingly service-oriented, digital, and borderless economy As students of tax reformwell know, however, the recognition from a normative perspective that a tax is wanting does not, by itself, create the political will necessary for successful reform For example, legislation that would overrule the physical presence test, subject to de minimis

6 If the states were to transform their sales taxes into true consumption taxes in which all business purchases were exempt and all household purchases for personal consumption (whether of goods or services) were taxable, we would have gone a long way toward creating a simple and uniform sales tax that

could be administered in a multistate environment with minimal burdens for interstate vendors See

generally Charles E McLure, Jr., Radical Reform of the State Sales and Use Tax: Achieving Simplicity, Economic Neutrality, and Fairness, 13 HARV J.L & T ECH 567 (2000) To determine whether a

transaction was taxable, a vendor would need to know only whether the purchase was for personal

consumption or for business purposes To be sure, there still could be issues with respect to identifying purchases for business use as distinguished from personal use and determining the proper “destination” state in connection with the sale of digital products for personal consumption Nevertheless, these

problems would pale by comparison to those that vendors confront under the existing sales and use tax system Moreover, states could deal with these issues by adopting standard conventions for identifying business purchasers and for sourcing sales of digital products.

7 Bellas Hess, 386 U.S 752; Quill, 504 U.S 298.

exclusions and limited simplification requirements, has been introduced from time to time,8 only to flounder This proposed legislation, however, sought neither to address theissue of sales tax complexity in a serious way nor to reform the sales tax base Similarly, modern experience with broad-based efforts to expand the sales tax to services provides little basis for thinking that the public is ready for radical reform of the sales tax base, as sensible as such reform may be.9 Before drawing too firm a conclusion from these efforts, however, it is worth noting that the Florida and Massachusetts “experiments” with expanding the sales tax base to services did not embody all the fundamental reforms described above, because they failed to exempt business services from the tax In fact, that theoretical flaw may have led to their political failure because it created broad opposition, especially from the advertising industry.

What, then, has given rise to streamlining and has driven its success to date?10 First, there are the state failures to remedy the inequities of the de facto exemption for

remote sales without embracing broader reform In Quill Corp v North Dakota, 11 the states were unsuccessful in persuading the Supreme Court to abandon the physical presence test More recently, states have been unable to persuade Congress to impose

more equitable state tax jurisdictional rules despite the Quill Court’s suggestion that

Congress take the lead on this issue To the contrary, Congress’s only significant foray into this arena has been to perpetuate existing inequities by adopting (and subsequently

8 See, e.g., Interstate Sales Tax Collection Act of 1987, H.R 1242, 100th Cong., 1 st Sess (1987); Equity in Interstate Competition Act of 1987, H.R 3521, 100 th Cong., 1 st Sess (1987).

9 Samuel B Bruskin & Kathleen K Parker, State Sales Taxes on Services: Massachusetts as a

Case Study, 45 TAX L AW 49 (1991); Walter Hellerstein, Florida‘s Sales Tax on Services, 41 NAT ’ L T AX J.

1 (1988)

10 As discussed in Part V, the ultimate success of streamlining is far from certain Moreover, as

we suggest in Part VI, whether streamlining is an example of “successful” tax reform will be debated even

if it is achieves its admittedly limited objectives.

11 504 U.S 298 (1992).

extending) the Internet Tax Freedom Act, which, very generally, exempts Internet access from state sales taxes and freezes existing nexus rules with respect to Internet retailing.12 These failures caused the states to “go back to the drawing board” and acknowledge, however grudgingly, the complexity of the present system and the burden that the system imposes on vendors and state tax administrators More fundamental reform evidently was needed either to (a) build a broader and more successful political coalition and/or (b) convince Congress or the Supreme Court that the factual underpinnings purportedly justifying the physical presence test had been removed

It is doubtful, however, that this recognition would have motivated a sustained reform effort had the states not also been acutely aware of the threat that the growth of electronic commerce, coupled with the de facto exemption for remote sales, posed to the future of the sales tax This second driving force—electronic commerce—also served to build a broader coalition for reform Although brick and mortar retailers have always been troubled by the de facto exemption allowed to their mail- (phone- and fax-) order competitors, this concern now appeared to be dwarfed by the perceived (if ultimately overblown) threat posed by the Internet’s promise of virtual shopping for nearly every consumer purchase Further, it is reasonable to speculate that both brick-and-mortar retailers and the broader business community, having observed the urgency of the states, insisted on sales tax simplification as a quid pro quo for relaxing nexus rules as matter of negotiating instinct.13

12 Pub L No 105-277, Title XI, 112 Stat 2681 (1998).

13 A time-honored negotiating strategy is that if the other side asks for something, always ask for something in return, even if the other side is asking for something you want too As will be discussed below, this is even more evident in the business community’s request for “bright-line” nexus rules for state business activity taxes Even though streamlining is good for business in its own right, concessions are being asked for in other areas.

Third, the states have come to believe that the increased availability of modern technology may permit them to assist or cooperate with retail merchants in administering

a simplified sales tax If, for example, states could develop or endorse tax compliance software on which retailers could rely, the result could be expanded voluntary

compliance and, perhaps, congressional or judicial relaxation of the constitutional rules that now prohibit them from requiring remote sellers to collect use taxes on interstate sales Indeed, as we discuss in greater detail in Part IV, SSUTA addresses sales tax complexity by both adopting simplifications and creating and endorsing compliance software designed to tackle complexity head-on

III Antecedents to the Streamlining Movement: Groping for Consensus

As noted above, the origins of the SSTP lie in the intense and widespread interest

in state taxation of electronic commerce that preoccupied the state tax field during the late 1990s.14 The advent of electronic commerce raised a number of questions as to whether and how state and local taxes, particularly sales and use taxes, should be applied

to such commerce Among those concerns was that the complexity within and

inconsistency among state and local sales tax regimes limited the ability of these regimes

14 See, e.g., Walter Hellerstein, Deconstructing the Debate Over State Taxation of Electronic

Commerce, 13 HARV J.L & T ECH 549 (2000); Walter Hellerstein, Federal Constitutional Limitations on

Congressional Power to Legislate Regarding State Taxation of Electronic Commerce, 53 NAT ’ L T AX J

1307 (2000); Walter Hellerstein, Internet Tax Freedom Act Limits States’ Power to Tax Internet Access

and Electronic Commerce, 90 J TAX ’ N 5 (1999); Walter Hellerstein, State and Local Taxation of

Electronic Commerce: Reflections on the Emerging Issues, 52 MIAMI L R EV 691 (1998); Walter

Hellerstein, State Taxation of Electronic Commerce, 52 TAX L R EV 425 (1997); Kendall Houghton &

Walter Hellerstein, State Taxation of Electronic Commerce: Perspectives on Proposals for Change and

Their Constitutionality, 2000 BYU L REV 9 The ensuing discussion draws freely from the last cited article.

to accommodate the world of electronic commerce Although this was not a novel concern to state taxpayers and state tax administrators, because it resembled those caused

by traditional mail-order sales, the concern was exacerbated in the context of electronic commerce because of the expectation that more vendors than ever before would be selling more products (digital and nondigital) into more states with less contact and less familiarity with the states and their tax systems Consequently, the need for

simplification of the state and local sales and use tax system was apparent if it was to be

a viable mechanism for raising revenue from electronic commerce

A The National Tax Association’s Communications and Electronic Commerce Tax Project

It was in the context of the growing interest in and concern over the questions described above that the National Tax Association (NTA)15 in early 1997 formally convened the National Tax Association’s Communications and Electronic Commerce Tax Project (the NTA Project or the Project) The NTA Project brought together

representatives of the business community, state and local governments, and academia who shared an interest in identifying possible solutions to the state and local tax issues raised by electronic commerce.16 It was widely believed that if agreement could be reached, it would involve a combination of simplification and an expanded duty to collect use tax

15 The NTA, with a broad-based membership from business, government, and academia, has a long and distinguished history as a forum for the discussion and evaluation of tax policy.

16 NTA, Description of the Organization and Operations of the Communications and Electronic

Commerce Tax Project (undated), http://ntanet.org/ (accessible from the NTA homepage by clicking on

E-Commerce and Tax Policy: Official Documents: OD-1).

After more than two years of work, however, the NTA Project was unable to reach a comprehensive agreement that satisfied the concerns of both government and business representatives on the set of issues it explored.17 Nevertheless, in a broad and informal sense, consensus began to form around several key matters that carried over to the subsequent work of the SSTP.18 Specifically:

 Sales and Use Tax Rates The Project generally acknowledged that the

multiplicity of tax rates imposes significant administrative burdens on

multistate sellers, particularly smaller sellers whose ability to sell nationally and internationally has been enhanced by the advent of electronic commerce Accordingly, there was broad recognition of the desirability of limiting state and local sales and use tax rates to one tax rate per state, which would apply toall commerce involving taxable goods or services in that state Because of thepotential revenue impact of such a rule for local jurisdictions, there was likewise recognition that provision needed to be made to ensure the protectionand equitable distribution of revenues to local jurisdictions Although the SSTP abandoned the goal of one rate per state, it did adopt significant rate simplification measures.19

17 Consequently, the NTA Report did not make specific recommendations for addressing the problems raised by state taxation of electronic commerce NTA, Communications and Electronic

Commerce Tax Project Final Report (Sept 7, 1999), http://ntanet.org/ (accessible from the NTA homepage

by clicking on E-Commerce and Tax Policy, Final Report) Nevertheless, it did examine and thoughtfully analyze the critical questions raised by such taxation For a fuller discussion of the report, see W ALTER

H ELLERSTEIN & J OHN A S WAIN , S TREAMLINED S ALES AND U SE T AX ¶ 2.02 (2004).

18 Although formal votes were taken on a number of issues, these votes were contingent on reaching agreement on other issues, and the one operating principle on which Project participants did agree was that nothing was agreed to until everything was agreed to Because the Project was unable to reach consensus on an overall set of recommendations, the Report emphasized that it would seriously

misrepresent the Project’s work if one were to pluck from that work any of its tentative and preliminary findings, including those reached by a formal vote, and represent them as the Project’s conclusion.

19 SSUTA § 308

 Tax base The Project rejected proposals to require states to adopt a uniform

tax base, and participants generally agreed that state authority to determine taxability or exemption of goods and services should be preserved, or at least that such authority must be accepted as political reality Similarly, the SSTP made no attempt to impose a uniform tax base among the states

 Uniform “menu” defining goods and services Notwithstanding general

agreement that imposition of a uniform base would be either unrealistic or undesirable, participants acknowledged the very real problem that

inconsistent definitions of identical products created for multistate sellers Project members generally agreed that it would be desirable for the states to develop a uniform “menu” that they would use to define goods and services for sales and tax purposes while at the same time retaining the authority to determine whether or not such goods and services should be taxed This also would simplify the development of tax compliance software The definitionalmenu concept became a central feature of SSUTA.20

 Uniform Sourcing Rules For sourcing of transactions for sales and use

tax purposes, the NTA Project members were generally of the view that transactions should be sourced to the state of use or destination, and sourcing

to a sub-state level should not be required SSUTA followed this general approach to transaction sourcing, although local sourcing is required.21

 Simplification of State and Local Sales and Use Tax Administration

Anticipating the approach of the SSTP, the Project recognized that

20 See SSUTA §§ 327 and App C.

21 See SSUTA §§ 309-15.

simplification of current sales and use tax administration was critical,

regardless of its possible linkage to extending the duty to collect tax to certainremote sellers Although it did not adopt a formal recommendation endorsingspecific proposals for administrative simplification, the Project examined thefollowing types of simplifications: uniform vendor registration forms;

uniform sales and use tax returns; uniform state laws for bad-debt deductions;use of direct-pay permits; uniform exemption certificates and other exemptionadministration simplifications; and simplified audit, assessment, and appeal procedures for multistate sellers

Three key issues blocked the formation of a more comprehensive and definitive consensus on the sales and use taxation of electronic commerce First, there was little interest in seizing the moment to pursue more fundamental sales tax reform, such as expanding the base to including services and excluding business purchases from the base.Second, business and government were divided on the issue of expanding the duty to collect sales and use taxes beyond the existing physical presence test Many business participants were unwilling to endorse the idea of expanding nexus because of the lack ofdetails concerning sales tax simplification and a potential “spillover” effect on other taxes, e.g., the concern that an agreement for a more relaxed nexus standard in the sales and use tax context would be invoked by states in asserting income tax nexus.22

22 See generally Kendall L.Houghton & Gary C Cornia, The National Tax Association’s Project

on Electronic Commerce and Telecommunications Taxes, 53 NAT ’ L T AX J 1351 (2000).

Third, no consensus was achieved on the best means for implementing sales tax reforms Still, it is worth considering briefly the Project’s consideration of the

implementation issue because it foreshadows the approach eventually taken by the SSTP.The Project considered two basic approaches to implementing its recommendations—federal legislation and cooperative state action, as well as a hybrid of these two

approaches Those supporting a federal legislative approach to implementation believed that federal legislation was the only effective way to ensure uniformity in the adoption of any proposals to modify existing state and local tax systems Those supporting a

cooperative state approach to implementation believed that it would be more sensitive to state concerns than federal legislation Proponents of voluntary state action recognized, however, that federal action (either legislative or judicial) would be necessary to expand the duty of remote sellers to collect use taxes beyond that permitted by current CommerceClause jurisprudence

A hybrid approach would have blended both state and federal action Under this approach, interested states would develop a multistate tax compact creating a harmonizedtax system, and Congress would remove most potential constitutional objections to the rules embodied in such a compact by approving it.23 States not enacting the harmonized system through the compact would remain subject to preexisting constitutional

limitations on their taxing authority This approach would allow states to retain their historic authority over the details of their tax system while permitting Congress to act to encourage consistency and uniformity in state and local taxation Although as a technicalmatter the SSTP and SSUTA reflect the cooperative or voluntary model of tax

simplification described above, as a matter of political reality the hybrid approach may more accurately describe the broad initiative being undertaken by the SSTP leadership and their allies in Congress

B The Advisory Commission on Electronic Commerce

In 1998, Congress joined the debate over state taxation of electronic commerce with its adoption of the Internet Tax Freedom Act (ITFA).24 Besides imposing limited substantive restraints on the states’ power to impose taxes on Internet access or to impose

“multiple” or “discriminatory taxes” on electronic commerce, ITFA established the Advisory Commission on Electronic Commerce (ACEC or the Commission), and required that it be composed of representatives from the federal government, state and local

governments, and the private sector

23 The most significant of these potential objections are the judicially created Commerce Clause restraints on the states’ power to require remote vendors to collect sales and use taxes.

24 Title XI of the Omnibus Consolidated and Emergency Appropriations Act of 1998, Pub L No.105-277, §§ 1101-04, 112 Stat 2681-719 (1998) (ITFA)

Congress charged the Commission with conducting a thorough study of federal, state, local, and international taxation of transactions using the Internet and other

comparable activities Among the state tax issues that Congress directed the Commission

to study—many of which were currently under consideration by the NTA Project—were

an examination of (1) model state legislation that would both provide uniform definitions oftaxable/exempt products and ensure that Internet-related transactions would be treated in a tax-neutral manner; (2) the effects of the taxation (or absence of taxation) of all interstate sales; and (3) ways to simplify federal, state, and local taxes on telecommunications

services.25 Congress directed the Commission to prepare a report within eighteen months (by April 2000) reflecting the results of its study and including legislative recommendations

Like the NTA Project, the ACEC never reached consensus on the key issues it examined because of the deep political and philosophical divisions among its members.26 Therefore, it never made any recommendations because its authorizing legislation required that any Commission recommendation command a two-thirds supermajority.27

Accordingly, the Commission’s most important legacy was the spate of proposals it

stimulated when, in the course of its deliberations, it invited the public to submit proposals for resolving the problems raised by state and local taxation of electronic commerce Indeed, one of these proposals—Utah Governor and Commission member Michael Leavitt’s

25 ITFA § 1102(g)(2).

26 The Commission was composed of nineteen members, including three representatives from the federal government (the Secretary of Commerce, the Secretary of the Treasury, and the United States Trade Representative); eight representatives from state and local governments (including at least one from a state without a sales tax and one from a state without an income tax); and eight representatives of the electronic commerce industry (including small business), telecommunications carriers, local retail businesses, and consumer groups The Senate Majority Leader and the Speaker of the House were given the right to appoint five members each, and the Senate Minority Leader and the House Minority Leader were given the right to appoint three members each From the outset, the discussions among the Commission members reflected

profound differences in outlook that one observer described as an “ideological circus John B Judis, Taxing

Issue, THE N EW R EPUBLIC , Oct 11, 1999, available at

http://www.tnr.com/archive/1099/101199/judis/101199

27 “No finding or recommendation shall be included in the report unless agreed to by at least thirds of the members of the Commission.“ ITFA § 1103

two-proposal for a “streamlined sales tax system,”28—established the framework for the

 Centralized, one-stop registration system

 Uniform tax base definitions

 Uniform, simple sourcing rules

 Uniform exemption administration rules (including a database of all exempt entities and removal of “good faith” acceptance rule30)

 Appropriate protection of consumer privacy

 Methodology for certifying software used in the sales tax administration process for tax rate and taxability determinations

 Uniform bad debt rules

 Simplified, consistent tax returns and remittance forms

 Consistent electronic filing and remittance methods

28 Statement of Governor Mike Leavitt, ACEC, Report to Congress, App A pp 71-73 (2000) The proposal was firmly grounded in the work of the NTA Project.

29 Statement of Governor Mike Leavitt, ACEC, Report to Congress, App A, p 71 (2000).

30 The reference is to the rule in force in many states that a seller is relieved of the obligation to collect a sales or use tax on the basis of the purchaser’s exemption certificate only when it accepts the certificate in “good faith.” Such a rule is particularly nettlesome to vendors because it puts the burden on sales personnel to determine the legitimacy of the purchaser’s exemption claim, a determination they are often in no position to make, and one that can too easily be second guessed with the benefit of hindsight

 State administration of all state and local sales taxes

 Uniform audit procedures

 Reasonable compensation for remote sellers

 De minimis threshold below which small business remote sellers would not be required to collect use tax31

Governor Leavitt’s proposal also recommended that Congress should enact

legislation authorizing the states to develop and enter into an Interstate Sales and Use Tax

Compact “[t]o implement this streamlined sales tax system.”32 The proposed legislation contemplated that states joining the Compact would be required to adopt a simplified sales tax system embodying the criteria identified above States so doing would then be

authorized to require remote sellers exceeding the sales volume threshold to collect use tax

on all taxable sales into a state Although Governor Leavitt’s proposal for a streamlined sales tax system may be identified as the template for the SSTP, he was neither acting alone nor in a vacuum when he advanced his plan Indeed, as chairman of the National

Governors’ Association, Governor Leavitt was very a much a spokesperson for the states (and tax administrators within those states) who were committed to the ideas he was

proposing and indeed were already engaged in implementing them

C Antecedents to Streamlining: Summary and Conclusion

The key contributions and lessons of these precursors to the SSTP can be

summarized as follows: First, an external economic event—the emergence of electronic

31 Statement of Governor Mike Leavitt, ACEC, Report to Congress, App A, p 72 (2000).

32 Statement of Governor Mike Leavitt, ACEC, Report to Congress, App A, p 71 (2000)

(emphasis supplied).

commerce—was a key stimulus behind state, business, and Congressional interest in sales tax simplification and reform Earlier efforts were pursued largely in isolation by state governments, against whom a well-organized direct marketing industry served as aneffective counterpoint Moreover, these earlier efforts were limited largely to the

elimination of the physical presence nexus test without pursuit of a concomitant reduction

in compliance burden Second, expansion of the scope of reform beyond nexus

liberalization was a key ingredient in stimulating the broader business community to become an active and constructive participation in the reform process Third, having business and government participate on equal footing in the proposal development stage proved ineffective Their interests seemed too deeply divided In particular, although willing to entertain the possibility of nexus expansion, business interests were generally unwilling to sign off on the idea unless simplification were more than an abstract

proposal Furthermore, business interests conditioned support for sales and use tax nexus expansion on state endorsement of business activity nexus contraction, something states were and remain unwilling to concede Fourth, although comprehensive consensusproposals were never adopted, the NTA Project and ACEC produced most if not all of thesubstantive reform ideas embraced by the SSTP Indeed, de facto consensus on many of these proposals was developed during these antecedent deliberations Fifth, although not

a novel idea, the NTA Project and ACEC reinforced the notion that an effective solution

to the sales tax issues raised by electronic commerce must come from either a cooperativeeffort among the states or from Congress (or both) Sixth, despite the window of

opportunity opened by the policy debate stimulated by electronic commerce, little interest

in fundamental sales tax reform was generated among the key actors

IV The Streamlined Sales Tax Project

A Guiding Principles: Applying the Lessons of the Past

The SSTP’s approach to sales tax simplification and reform has been shaped largely

by the lessons learned from its precursors First, the SSTP is state initiated and controlled Only the states are formal, voting members Without state control, drafting a concrete proposal that would satisfy state interests had proved elusive Second, in a concession to political reality, the SSTP has adopted the principles of “revenue neutrality” and “base neutrality.” Put differently, the SSTP has for the most part limited its focus to

administrative simplification Uniform base definitions have been developed, but only for the purpose of creating a menu of taxable and non-taxable items from which states can select Third, in another concession to political reality, the SSTP has made no direct effort

to expand its sales tax collection jurisdiction to remote sellers Simplification has been pursued as a valuable reform in its own right, and collection of tax by remote sellers is required only if they choose to participate in the simplified tax regime on a voluntary basis That said, states are clearly hoping that Congress or the courts will find that the SSUTA simplifications will be sufficient to remove the factual predicate for the physical presence test in member states, thus clearing the way for its ultimate repeal

These concessions have served the valuable purpose of encouraging the business community to participate in the streamlining process, thus building a broader consensus around the streamlining movement The greater business community has no principled objection to streamlining per se Indeed, it is a primary beneficiary of streamlining Thus it

has been in the business community’s interest to participate in the formulation of the

streamlined regime This participation, in turn, has broadened the streamlining coalition beyond a mere coterie of states The streamlining coalition remains fragile, however, in part

because of the business community’s insistence on various quid pro quos for congressional

approval of the nexus-expansion subtext of the of the streamlining initiative We examine these political issues in Part V of this paper

B Overview of the Streamlining Process

1 The SSTP

The SSTP was officially organized in March 2000 by participating states and the District of Columbia, shortly before the ACEC issued its final report.33 According to its organizing document,34 the SSTP’s mission was to “develop measures to design, test and implement a sales and use tax system that radically simplifies sales and use taxes.”35 A state could become a “participating state” eligible to vote at SSTP meetings by officially indicating its intent to support the SSTP’s mission and by designating a representative to vote on the state’s behalf States unwilling to join the SSTP as participating states were nevertheless eligible participate in the SSTP’s work as “observer states.”

33 The SSTP treats the District of Columbia as a state, and we shall do the same throughout this

discussion See Structure and Operating Rules, Streamlined Sales Tax Project, § II(A)(1), March 30, 2000,

available at www.streamlinedsalestax.org.; Streamlined Sales Tax Implementing States, Rules of

Procedure, § B(1) (adopted Nov 29, 2001, amended January 18, 2002), available at

The initial task of the SSTP was to draft a fundamental “constitutional” document

—the Streamlined Sales and Use Tax Agreement (SSUTA or the Agreement)—the substantive, administrative, and governance rules to which states that are parties to SSUTA must adhere The SSTP immediately undertook this task, which occupied the better part of two years

The SSTP conducted (and continues to conduct) its work through a co-chaired steering committee and a number of working groups SSTP participants are generally state revenue department administrators, but they also include representatives of state legislatures and local governments Businesses representatives actively participate in the SSTP through attendance and testimony at open meetings, comments on proposals, and informal offers of expertise.36

2 The Streamlined Sales Tax Implementing States

In November 2001, as SSUTA was being drafted, the states that had enacted legislation authorizing participation in the streamlining effort37 organized the StreamlinedSales Tax Implementing States (SSTIS) In substance, the SSTIS was the body that represented the participating states Its stated purpose was “to finalize an interstate agreement to simplify and modernize sales and use tax administration and to recommend

36 It is worth noting, however, that nongovernmental participants do not have a “seat at the table.” Rather, business representatives are invited to submit commentary and engage in discussions with SSTP participants, but they have no formal role in the Project Some members of the business community have criticized this aspect of the process and its influence on the nature of the “reform” emerging from the SSTP.

37 The Implementing States generally enacted one of two similar forms of legislation (either the

“Uniform Sales and Use Tax Administration Act” (as approved by the SSTP on December 22, 2000, and amended on January 22, 2001), or the “Simplified Sales and Use Tax Administration Act” (as adopted by the National Conference of State Legislatures’ Executive Committee on January 27, 2001)) These acts authorized the state to enter into the Agreement, if it met specified criteria relating to sales tax

harmonization and simplification