The Streamlined Sales and Use Tax Agreement: A Brief Description

CRS Report for Congress
The Streamlined Sales and Use Tax
Agreement: A Brief Description
Steven Maguire
Analyst in Public Finance
Government and Finance Division
Summary
Sales taxes are an important source of revenue for most states. The expansion of
Internet commerce, where vendors and customers are often in different states, has
eroded part of that revenue stream. As a result of U.S. Supreme Court decisions, states
are prevented from requiring remote (out-of-state) vendors to collect sales taxes. The
Court noted that it would be too burdensome on interstate commerce for remote vendors
to comply with each state’s unique tax code. For this reason, several states are
participating in an initiative to simplify and coordinate their tax codes — called the
Streamlined Sales and Use Tax Agreement (SSUTA). The member states hope that
Congress could be persuaded to allow them to require out-of-state vendors to collect
taxes from customers in SSUTA member states.
In the 109^th Congress, two bills, S. 2152 (Enzi) and S. 2153 (Dorgan), have been
introduced that would allow states that have adopted the SSUTA to compel out-of-state
vendors to collect sales and use taxes. This report will be updated as legislative events
warrant.
Cameron Ackroyd, an intern in the Government and Finance Division of CRS,
contributed to this report.
Sales Taxes and Internet Commerce
General sales and use taxes provide state governments with a significant share of
total tax revenue each year. The use tax is the companion to the sales tax, applied to
goods purchased from vendors outside the purchaser’s state of residence.¹ Sales taxes
generated about one-third, or approximately $198.4 billion, of the $593.5 billion of total

¹ Use tax burden is created by the use of a good or service. The use tax collection burden
generally falls on the consumer, rather than on the retailer as is the case with the sales tax. For
the remainder of this report, “sales tax” will be used to refer to both the “sales” and “use” tax.
Congressional Research Service ˜ The Library of Congress

state tax revenue in FY2004.² Many local governments also depend on the sales tax.
Local governments derived 11%, or approximately $44.6 billion, of their total tax revenue
from sales taxes in FY2003.³ Generally, this sales tax revenue is collected by the retailer
at the point of transaction and remitted to that state or local government. While the legal
burden is on the consumer, the retailer acts as the collection agent for the state.
States and their local governments are concerned that the expansion of Internet
commerce — and interstate transactions — will gradually erode their tax base. This
concern arises because the U.S. Supreme Court has ruled that out-of-state vendors are not
required to collect sales taxes for states in which they (the vendors) do not have nexus
(usually defined as physical presence).⁴ Note that at the time of these court decisions,
interstate sales were primarily through mail-order catalogues.
The growth of Internet commerce is certain, though the size of the revenue loss is
not. The Census Bureau of the Department of Commerce estimates that Internet
commerce in the third quarter of 2005 jumped 27% from the third quarter of 2004.⁵ For
2003 alone, revenue loss from uncollected taxes on Internet transactions was estimated
to be $8 billion.⁶ Even though there is significant debate surrounding the current size of
the sales tax revenue loss arising from the growth in Internet commerce, most observers
agree that the tax loss is significant and will likely grow robustly over time.
Given their dependence on sales taxes, states have a significant incentive to maintain
their sales tax revenue streams. Currently, one of the primary goals of many states is to
have Congress pass legislation allowing member states to require collection of sales taxes
by remote vendors. This effort was formalized by the Streamlined Sales Tax Project
(SSTP), whose task was to craft an agreement paving the way for “streamlined” state sales
taxes. This agreement is the Streamlined Sales and Use Tax Agreement or SSUTA.⁷
The SSTP, the entity that drafted the SSUTA, was created in 2000 by 43 states and
the District of Columbia (D.C.). These states and D.C. wanted to simplify and better
synchronize individual state sales and use tax laws. Its stated goal was to create a
simplified sales tax system so all types of vendors, from traditional Main Street retailers
to those conducting trade over the information superhighway, could easily collect and

² U.S. Census Bureau, “2004 State Government Tax Collections,” available online at
[ h t t p : / / www.census.go v/ go vs / www/ st at et ax.ht ml ] .
³ U.S. Census Bureau, “State and Local Government Finance by Level and Type of Government:

2002-03,” available online at [http://www.census.gov/govs/www/estimate03.html].

⁴ This legal status is shaped by two decisions regarding remote collection: National Bellas Hess,
Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and Quill Corporation v. North
Dakota, 504 U.S. 298 (1992).
⁵ U.S. Census Bureau, “Quarterly Retail E-Commerce Sales,” available online at
[ h t t p : / / www.census.go v/ mr t s / www/ dat a / pdf / 05Q3.pdf ] .
⁶ Donald Bruce and William F. Fox, “State and Local Sales Tax Revenue Losses from E-
commerce: Estimates as of July 2004,” University of Tennessee Center for Business and
Economic Research, July 2004, p. 5.
⁷ For the most recent version of the agreement see, [http://www.streamlinedsalestax.org/
agreement.htm]. It was most recently revised Jan. 13, 2006.

remit sales taxes. The member states believe that a simplified, relatively uniform tax code
across states would make it easier for remote vendors to collect sales taxes on goods sold
to out-of-state customers. The SSTP was dissolved once the SSUTA became effective
on October 1, 2005.⁸
Description of the Agreement
Under the SSUTA, member states request that remote sellers voluntarily collect sales
taxes on items purchased by customers outside their home state. Vendors in participating
states who voluntarily collect the sales tax would be offered amnesty for previously
uncollected taxes. Participating states have agreed to share the administrative burden of
collecting taxes to ease tax collection for sellers. The states’ obligations under the
SSUTA include the following:⁹
^!Agree to uniform definitions for all taxable items. States participating
in the SSUTA must define all goods in the same way. For example, a
pumpkin could be defined as either food or home décor. In many states,
food is exempt from taxation. All states will agree to one definition, so
a pumpkin seller in Illinois would know the tax status of pumpkins in all
states, not just Illinois. As another example, what percentage of fruit
juice does a beverage need to contain to be considered fruit juice instead
of soda? If fruit juice is taxed differently from soda, as is often the case,
sellers could be confused by conflicting definitions in different markets.
Each state retains the choice over whether or not the item is taxable. All
local governments in a state must use the same state-defined tax base.
^!Simplify tax rates. It is fairly common for states and local jurisdictions
to tax different goods at different rates. This complication is mostly
remedied under the SSUTA, as each state will be allowed only one tax
rate (with an exception for a second state rate on food and drugs). Each
state can add one additional local jurisdiction rate, based on ZIP code, to
compensate for lost local tax revenue. The member state must maintain
a catalogue of rates for all ZIP codes. For ZIP codes with multiple rates,
an average rate for that ZIP code would apply.
^!Simplify collection. Businesses will no longer file tax returns with each
state (and sometimes local) government where they conduct business, as
is often the case where the SSUTA has not gone into effect. Instead,
sales taxes will be remitted to a single state agency. Thus, states will
bear some of the administrative cost of the technology employed to
implement the new system. Vendor compensation is still under
negotiation.

⁸ Jeffery A. Friedman and Charles C. Kearns, “Federal Streamlined Sales Tax Legislation
Introduced in Senate,” State Tax Notes, Jan. 16, 2006, pp. 131-136.
⁹ For more information, see [http://www.streamlinedsalestax.org].

Which States Are in the SSUTA?
As of this writing, 44 states and the District of Columbia participate in the
streamlining project, although 25 are not full or associate members of the SSUTA.
Thirteen of these states are full members and another six are associate members. Only the
full-member states will have taxes collected by remote vendors. Following is a listing of
the status of each state.
Full-Member States. There are 13 full-member states that have changed their
sales tax laws to fully conform with the agreement: Indiana, Iowa, Kansas, Kentucky,
Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma,
South Dakota, and West Virginia.
Associate-Member and Participating States. At present, six states have
begun implementing all the requirements of the project and are considered associate
members: Arkansas, Ohio, Tennessee, Utah, Wyoming, and as of January 1, 2006,
Nevada. These six states will become full members on January 1, 2008, when they
anticipate adopting into law all the rules and regulations that accompany full membership.
Other states and the District of Columbia are participating, but are not close enough to
qualify as full or associate members. These 25 states are: Alabama, Arizona, California,
Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Maryland,
Massachusetts, Mississippi, Missouri, New Mexico, New York, Pennsylvania, Rhode
Island, South Carolina, Texas, Vermont, Virginia, Washington, and Wisconsin.
Non-participating states. The following states are not participants because they
do not levy a statewide sales tax (Alaska, Delaware, Montana, New Hampshire, and
Oregon) or they levy a statewide sales tax but have chosen not to participate (Colorado).
Alaska does allow some localities to levy a local sales tax, but these localities are not
represented in the SSUTA compact.
The Stakeholders. The streamlined sales tax enjoys the collective support of the
National Governors Association (NGA). The NGA has endorsed the SSUTA with hopes
that the agreement could address the Supreme Court’s concerns about the burden on
interstate commerce of collecting remote taxes. The association believes that requiring
remote vendors to collect sales and use taxes under a new, simplified system could
survive legal challenges.¹⁰
Other support comes from large “brick and mortar” retailers who must collect sales
taxes and believe the current system provides an unfair advantage to Internet retailers who
do not collect such taxes. Brick and mortar companies with a strong Internet presence,
such as Walmart.com and ToysRUs.com, voluntarily comply with SSUTA guidelines and
use them to collect taxes on remote sales.¹¹

¹⁰ National Governors Association, “Key Committee Issues,” available online at
[http://www.nga.org/portal/site/nga/menuitem.5361c0f4fe6e68d18a2781105 01010a0/?vgnext
oid=a2b1bf83c0e81010VgnVCM1000001a01010aRCRD&vgn ext c hannel = 455c8aaa2ebbf f 0 0
V gnV CM1000001a01010aRCRD] .
¹¹ Wyld, David C., “Don’t Shoot the Internet,” Computerworld, vol. 37, Issue 27, p. 21 (2003).
Viewed online through Academic Search Premier (Jan. 10, 2006).

On the other side of the issue are individuals and businesses that benefit under the
current system. Consumers in states with high sales tax rates can purchase goods online
and easily evade paying sales taxes.¹² Businesses that sell goods online to these out-of-
state consumers also benefit as their products, absent the sales tax, are marginally less
expensive than the brick and mortar alternative.
Also opposing the SSUTA are several anti-tax groups who see the SSUTA as a new
tax burden rather than a simplification of the current tax system.¹³ Anti-tax groups also
argue that states compete to attract businesses and customers through lower tax rates and
that this competition is good for consumers.
Many businesses are taking the middle ground in this debate. They understand the
states’ desire to more efficiently collect sales tax revenue in a fair manner but, not
surprisingly, they ask for greater simplification and increased vendor compensation from
the states for collecting state sales taxes.
Issues for the 109^th Congress
In the 109^th Congress, S. 2152 (Enzi) and S. 2153 (Dorgan) would grant full-member
states in the SSUTA the authority to compel out-of-state vendors to collect sales and use
taxes on remote sales.¹⁴ Both bills would respond to the Supreme Court’s
recommendation in Quill that Congress act, under the commerce clause, to clarify state
sales tax collection rules. More specifically, the legislation would allow states that have
fully adopted the simplified tax system to collect sales taxes from sufficiently large
businesses even if those businesses do not have a nexus in the state. Generally, in S.
2152, a “sufficiently large business” is one with nationwide sales of greater than $5
million. S. 2153, in contrast, assigns the responsibility for defining a small business to
the Small Business Administration (SBA), with the ultimate approval of Congress. Both
bills would set minimum standards of simplification before states would be allowed to
demand remittance of sales and use taxes. The proposed legislation would have the Court
of Federal Appeals review any disputes related to tax collection.

¹² As described earlier, consumers are required to remit consumer use taxes to their state of
residence if the remote vendor has not collected the tax. Not paying use taxes is tax evasion.
However, states typically do not pursue collection from these consumers, as the tax yield could
be considerably smaller than the cost of enforcing use tax remittance.
¹³ Americans for Tax Reform,”The Streamlined Sales Tax Proposal: A Tax Increase Under the
Radar,” Policy Brief, Undated material available on the Internet at [http://www.atr.org/content/
pdf/2005/dec/120704ot_SST Ppb.pdf].
¹⁴ The U.S. House Small Business Subcommittee on Regulatory Reform and Oversight held an
oversight hearing on the streamline legislation, S. 2152 and S. 2153, on Feb. 8, 2006. The
submitted witness testimony is available from the subcommittee website at
[ h t t p : / / wwwc.house.go v/ smbiz/hearings/databaseDrivenHearingsSystem/displ a yHear i n gs .asp
?congress=109].