State and Local Taxes and the Streamlined Sales and Use Tax Agreement

State and Local Taxes and the Streamlined
Sales and Use Tax Agreement
Updated September 16, 2008
Steven Maguire
Specialist in Public Finance
Government and Finance Division

State and Local Taxes and the Streamlined
Sales and Use Tax Agreement
State sales and use taxes are consumption taxes that are levied according to the
destination principle. The destination principle prescribes that taxes should be paid
where the consumption takes place. A sales tax that is collected by vendors at the
point of sale implicitly assumes consumption takes place near the point of
transaction. Use taxes, in contrast, are levied on products consumers purchase from
out-of-state vendors usually over the telephone or Internet. The rate of tax is based
on the destination principle, in this case, the delivery address. Sales and use taxes are
almost always the same rate in a given jurisdiction.
Under current law, states cannot reach beyond their borders and compel out-of-
state vendors (without nexus in the buyer’s state) to collect the use tax owed by state
residents. The Supreme Court has ruled that requiring remote vendors to collect the
use tax would pose an undue burden on interstate commerce. States are concerned
because they anticipate gradually losing more sales tax revenue as the growth of
Internet commerce allows more residents to buy products from vendors located out-
of-state and evade use taxes. Estimates put this loss at approximately $8 billion in
2003. Congress is involved because interstate commerce typically falls under the
Commerce Clause (and in some cases Due Process Clause) of the Constitution.
New congressional action on the remote collection issue is uncertain.
Opponents of remote vendor use tax collection cite the complexity of the myriad state
and local sales tax systems and the difficulty vendors would have in collecting and
remitting use taxes. Proponents would like Congress to change the law and allow
states to require out-of-state vendors without nexus to collect state use taxes. These
proponents acknowledge that simplification and harmonization of state tax systems
are likely prerequisites for Congress to consider approval of increased collection
authority for states.
A number of states have been working together to harmonize sales tax collection
and have created the Streamlined Sales and Use Tax Agreement (SSUTA). The
SSUTA member states hope that Congress can be persuaded to allow them to require
out-of-state vendors to collect taxes from customers in SSUTA member states. In the
110th Congress, S. 34 (Senator Enzi) and H.R. 3396 (Representative Delahunt) would
grant SSUTA member states the authority to compel out-of-state vendors in other
member states to collect sales and use taxes.
A related issue is the “Internet Tax Moratorium.” The moratorium prohibits (1)
new taxes on Internet access services and (2) multiple or discriminatory taxes on
Internet commerce. Congress has extended the “Internet Tax Moratorium” twice.
The most recent extension expires November 1, 2014. The moratorium is distinct
from the remote use tax collection issue, but has been linked in past debates. For
more on the Internet tax moratorium, see CRS Report RL33261, Internet Taxation:
Issues and Legislation, by Steven Maguire and Nonna Noto.
This report will be updated as legislative events warrant.

In troduction ......................................................1
State and Local Sales and Use Taxes...................................2
Components of the Sales and Use Tax.............................2
Tax Base.................................................2
Tax Rate.................................................5
Economic Issues...............................................8
Efficiency ................................................8
Equity ..................................................10
Differential Effect Among States.............................10
Revenue Loss Estimates...................................11
The Streamlined Sales and Use Tax Agreement.........................11
Description of the SSUTA......................................11
Standard Definitions of Products.............................12
Simplified Tax Rates......................................12
Standard Rate Sourcing Rules for Cross-jurisdictional Sales.......12
Simplified Administration..................................12
Which States Are in the SSUTA?................................13
Member States...........................................13
Associate Member States...................................13
Non-participating States....................................13
The Stakeholders.........................................13th
SSUTA Legislation in the 110 Congress..........................14
List of Tables
Table 1. State and Local General Sales and Gross Receipts Taxes as
Percent of Total Personal Income, by State, FY2006..................3
Table 2. State and Local Sales Tax Rates and Reliance on
Sales Tax Revenue, FY2006 .....................................6

State and Local Taxes and the Streamlined
Sales and Use Tax Agreement
State governments rely on general sales and use taxes for approximately one-
third (31.9%) of their total tax revenue — approximately $227 billion in FY2006.
Local governments derive 11.5% of their tax revenue — approximately $55 billion
in FY2006 — from local sales and use taxes.1 Both state and local sales taxes are
usually collected by vendors at the point of transaction and levied at a percentage of
a product’s retail price. Alternatively, use taxes, typically levied at the same rate, are
often not collected by the vendor if the vendor does not have nexus (loosely defined
as a physical presence) in the consumer’s state. Consumers are required to remit use
taxes to their taxing jurisdiction. Compliance with this requirement, however, is
quite low.
State and local governments are concerned that the expansion of Internet
commerce — the Census Bureau of the Department of Commerce estimated that
Internet commerce jumped 9.5% from the second quarter of 2007 to the second2
quarter of 2008 — will gradually erode their tax base. This concern arises in part
because the U.S. Supreme Court ruled out-of-state vendors are not required to collect3
sales taxes for states in which they (the vendors) do not have nexus. In hopes of
stemming the potential loss of tax revenue, 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 resident
Congress has a role in this issue because interstate commerce, in most cases,4
falls under the Commerce Clause of the Constitution. Congress will likely be asked
to choose between taking either an active or passive role in the debate. In the 110th
Congress, S. 34 (Senator Enzi) and H.R. 3396 (Representative Delahunt) would grant
SSUTA states the authority to compel out-of-state vendors to collect sales and use

1 U.S. Bureau of the Census, “State and Local Government Finances: 2005-06,” available
online at [].
2 U.S. Census Bureau, “Quarterly Retail E-Commerce Sales 2nd Quarter 2008,” Aug. 15,

2008, available online at [].

3 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).
4 U.S. Constitution, art. 1, sec. 8.

taxes. A more passive approach by Congress could involve states implementing the
SSUTA without congressional approval. State enforcement of remote collection
would likely face legal challenges, and the outcome of these legal challenges is
uncertain. This report intends to clarify significant issues in the remote sales tax
collection debate, beginning with a description of state and local sales and use taxes.
State and Local Sales and Use Taxes
In 1932, Mississippi was the first state to impose a general state sales tax.5
During the remainder of the 1930s, an era characterized by declining revenue from
corporate and individual income taxes, 23 other states followed suit and implemented
a general sales tax.6 At the time, the sales tax was relatively easy to administer and7
raised a significant amount of revenue despite a relatively low rate. Given the
relative success of the sales tax in raising revenue, 45 states and the District of
Columbia added the sales tax to their tax infrastructure by the late 1960s. The last
of the 45 states to enact a general sales and use tax was Vermont in 1969.8
Components of the Sales and Use Tax
The revenue generated by a sales and use tax, assuming a given level of
compliance, depends on the base of the tax and the tax rate. The narrower the base
the higher the rate required to raise an equivalent amount of revenue. States often
have similar consumption items included in their tax base, but they are far from
uniform. Tax rates can also vary considerably, depending on the state’s reliance on
other revenue sources.
Tax Base. The sales tax, which is considered a consumption tax, is perhaps
better identified as a transaction tax on the transfer of tangible personal property.
Expenditures on most services, such as medical services, are typically excluded from9
the state sales tax base. In most states (31), groceries are also exempt from the sales
tax or taxed at a lower rate (another seven states, see Table 1). A true consumption

5 Mississippi added a use tax, the companion to the sales tax, in 1938. A use tax is a tax on
the use of a product. In the early years of the sales tax, states began with general sales then
added the use tax. Eventually, states adopting a sales tax included the use tax in the
enacting legislation.
6 William F. Fox, ed., Sales Taxation: Critical Issues in Policy and Administration, Sales
Tax Trends and Issues, by Robert Ebel and Christopher Zimmerman (Westport, CT: Praeger,

1992), pp. 3-26.

7 The highest sales tax rate in 1934 was 3%, which was considered quite high at the time.
Today, in some Alabama jurisdictions, the combined state and local tax rate can be as high
as 12.0%.
8 The five states without a state sales and use tax are Alaska, Delaware, Montana, New
Hampshire, and Oregon. Alaska allows local jurisdictions to impose a local sales tax.
9 For example, only two states, Hawaii and New Mexico, tax medical services.

tax would include all income that is not saved, including personal expenditures on
grocery food and services.10
Table 1. State and Local General Sales and Gross Receipts
Taxes as Percent of Total Personal Income, by State, FY2006
GSGR StateStateGSGR Tax as
StateGrocery Food& Local TaxPersonalPercent of
(italics =no state(Taxable orRevenue inIncome 2006Personal
income tax)Exempt)FY2006($ millions)Income
($ millions)2006
(a) ( b) (c) ( d) (e)
Alabama T 3 ,844 141,811 2.71%
Alaska 17125,8360.66%
Arizo na E 7 ,463 196,909 3.79%
Arka nsa s T 3 ,598 79,983 4.50%
Ca lif o r nia E 40,348 1,436,446 2.81%
Co lo ra do E 4 ,801 188,222 2.55%
Co nnect icut E 3 ,041 177,453 1.71%
Delaware 033,3690.00%
District of ColumbiaE81733,8082.42%
Flo rid a E 21,976 663,077 3.31%
Georgia E 9 ,492 299,834 3.17%
Haw a ii T 2 ,355 47,340 4.97%
Ida h o T 1 ,079 43,800 2.46%
Illino i s T a 9,064 490,755 1.85%
India n a E 5 ,334 203,502 2.62%
Io w a E 2 ,272 98,208 2.31%
Kansas T b 2,829 95,901 2.95%
K e nt ucky E 2 ,758 124,993 2.21%
Lo uisia n a E c 6,598 135,026 4.89%
Maine E d 1,041 42,202 2.47%
Maryland E e 3,382 245,303 1.38%
M a ssa c huse t t s E 4 ,009 297,905 1.35%
M ichigan E 8 ,081 341,337 2.37%
M i nneso t a E 4 ,506 200,300 2.25%
M i ssissippi T 3 ,049 78,356 3.89%
M i sso ur i T f 4,933 191,413 2.58%
Montana 029,1520.00%
Nebra ska E 1 ,648 60,744 2.71%

10 A common identity in the economics of income accounting is the following: C=Y-S. Or,
consumption (C) equals income (Y) less saving (S). Thus, income less savings is total

GSGR StateStateGSGR Tax as
StateGrocery Food& Local TaxPersonalPercent of
(italics =no state(Taxable orRevenue inIncome 2006Personal
income tax)Exempt)FY2006($ millions)Income
($ millions)2006
(a) ( b) (c) ( d) (e)
Nevada E 3 ,321 97,189 3.42%
New Hampshire* 052,1490.00%
New JerseyE6,853405,2541.69%
New MexicoEg2,46958,1314.25%
New YorkE21,802848,9372.57%
North CarolinaEh6,785286,0102.37%
North DakotaE51020,8852.44%
Ohio E 9 ,201 381,963 2.41%
Okla ho ma T 3 ,186 115,881 2.75%
Oregon 0122,9090.00%
Pennsylvania E i 8,605 456,732 1.88%
Rhode IslandE85439,8352.14%
South CarolinaTj3,282128,8932.55%
South DakotaT91425,2553.62%
T e nnessee k T l 8,206 195,441 4.20%
Texas E 22,529 823,159 2.74%
Uta h T m 2,421 75,853 3.19%
Vermont E 330 21,647 1.52%
Virg inia T n 4,284 302,098 1.42%
Washington E 11,813 243,597 4.85%
West VirginiaTo1,12651,0162.21%
Wisc o n sin E p 4,395 191,726 2.29%
Wyom ing E q 803 20,846 3.85%
Sources: Column (b) and notes, CCH State Tax Handbook 2007, p. 533-534; columns (c) and (d), U.S. Bureau
of Census; and column (e), authors calculations.
a. Taxed at reduced rate of 1%
b. Limited tax refund available to disabled, elderly, and low-income households
c. Exemption applies to food sold for preparation and consumption in the home
d. Exemption limited to “grocery staples”
e. Sales of food for consumption off-premises exempt when sold by a substantial grocery or market business,
where at least 10% of all food sales are sales of grocery or market foods
f. Taxed at reduced rate of 1.225%
g. Receipts from sales of food at a retail food store may be deducted from gross receipts
h. Exempt from state sales taxes but subject to local sales taxes
i. Type of food and location of sales determine taxability
j. Effective Oct. 1, 2006, the state rate on unprepared food that can be purchased with federal food stamps is
reduced from 5% to 3%
k. Only capital income included in the personal income tax in New Hampshire and Tennessee
l. Taxed at reduced rate of 6%
m. Effective Jan. 1, 2007, reduced rate of 2.75% imposed on food and food ingredients. In a bundled transaction
involving both food and another item of tangible personal property, the rate is 4.75%
n. Taxed at a reduced rate of 1.5% plus the local rate of 1.0%
o. Effective Jan. 1, 2006, taxed at the reduced rate of 5%
p. Some snack foods may be excluded from the exemption
q. Food for domestic home consumption was exempt from July 1, 2006, through June 30, 2008

Business-to-business transactions are often exempt from the retail sales tax,
particularly in cases where the purchaser is using the good as an input to production.
These transactions are exempt because including the transactions could lead to the
“pyramiding” of the sales tax. For example, if a coffee shop were to pay a retail sales
tax on the purchase of coffee, and then impose a retail sales tax on coffee brewed for
the final consumer, the total sales tax paid for the cup of coffee would likely exceed
the statutory rate. Products that a business purchases for resale are typically not
assessed a retail sales tax for a similar reason. If a coffee shop buys beans only for
resale, levying a sales tax on the wholesale purchase of the beans and then on the
retail sale would more than double the statutory rate. The tax treatment of business
purchases is not uniform across states. According to some estimates, approximately

18% of business purchases are taxable depending on the state.11

Many individuals and organizations are also exempt from state sales taxes.
Entities wishing to claim the sales tax exemption are often issued a certificate
indicating their tax-free status and are required to present this certification at the
point of transaction. Non-profit organizations, such as those whose mission is
religious, charitable, educational, or promoting public health, often hold sales tax-
exempt status.
The SSUTA would establish a system where states would use common
definitions for goods and services. Once a uniform definition is established, states
would then indicate whether the good or service is taxable. In addition, states would
identify which entities would be exempt from paying sales taxes (e.g., non-profit or
religious organizations).
Tax Rate. The second component of a sales tax is the tax rate applied to the
base, described in the previous section. In 35 states, local governments piggy-back
a local sales tax (which often varies among localities within the state) on the state
sales tax; 10 states and the District of Columbia levy a single rate (see Table 2), with
no local taxes. Some states in the group of 35 may collect a uniform local tax along
with the state tax and send the local revenue share back to the localities. This
structure would look like a single rate to the consumer because vendors typically do
not differentiate between the state and local share. For example, vendors in Virginia
levy a 5.0% sales tax on purchases and remit the entire amount to the state. The state
then sends what would have been raised by a 1.0% tax back to the local jurisdiction
where the tax was collected. The state of Virginia keeps the remaining 4.0%.
Indiana, Mississippi, New Jersey, Rhode Island, and Tennessee have the highest
state sales tax rate of 7.0%. In 2008, however, Alabama had the highest potential
combined state and local rate of 12.0%. Residents in high sales tax rate jurisdictions
could gain from Internet purchases (and tax evasion) more than those in low tax rate
states. Recognizing this potential revenue drain, many high-rate states have stepped
up efforts to inform consumers of their responsibility to pay use taxes on Internet and

11 Robert Cline, John Mikesell, Tom Neubig, and Andrew Philips, “Sales Taxation of
Business Inputs,” Council on State Taxation Special Report, Jan. 25, 2005.

mail-order catalog purchases.12 As suggested earlier, states with high rates — and
whose residents have a greater incentive to evade taxes — are exposed to greater
potential revenue losses from the growth of Internet commerce. Because of the
greater potential losses, these states are more likely to support reforms that help
maintain their sales and use tax revenue base.
Table 2. State and Local Sales Tax Rates and Reliance on
Sales Tax Revenue, FY2006
StateStateTopTotalS & L TaxGSGRS & L TaxGSGRTax as
(italics=no incomeRateLocalRevenueRevenue% ofRank
tax)Rate($ millions)($ millions)Total
(a) ( b) (c) ( d) (e) (f) (g)
Alabama 4 .000 8.000 12,768 3,844 30.1% 13
Alaska n/a 7 .500 3,665 171 4.7% 47
Arizona 5 .600 5.500 19,940 7,463 37.4% 7
Arkansas 6.000 5.500 8,747 3,598 41.1% 4
California 6 .250 2.500 163,749 40,348 24.6% 22
Co lo rado 2.900 7.000 17,224 4,801 27.9% 17
Co nne c t i c ut a 6.000 n/a 19,872 3,041 15.3% 41
Delaware n/a n/a 3,618 0 0 .0% 4 8
District of Columbia5.750n/a4,54581718.0%36
Florida 6.000 1.500 66,695 21,976 33.0% 11
Georgia 4 .000 3.000 31,025 9,492 30.6% 12
Hawaii 4.000 0.500 6,199 2,355 38.0% 6
Idaho 6 .000 3.000 4,503 1,079 24.0% 24
I llino is 6 .2 5 0 3 . 5 0 0 5 2 , 1 4 4 9 , 0 6 4 1 7 . 4 % 4 0
Indianaa 7.000 n/a 22,950 5,334 23.2% 25
Iowa 6.000 2.000 10,256 2,272 22.2% 28
Kansas 5.300 3.000 10,452 2,829 27.1% 18
K e nt uc kya 6.000 n/a 13,558 2,758 20.3% 31
Lo uisiana 4 .000 6.750 15,724 6,598 42.0% 3
Maine a 5.000 n/a 5 ,806 1,041 17.9% 37
Maryland a 6.000 n/a 25,789 3,382 13.1% 44
M a ssa c huse t t s a 5.000 n/a 30,636 4,009 13.1% 45
Michigana 6.000 n/a 36,017 8,081 22.4% 27
Minneso ta 6.500 1.000 22,491 4,506 20.0% 32
Mississippi 7.000 0.250 8,180 3,049 37.3% 8
Misso uri 4 .225 4.750 18,312 4,933 26.9% 19

12 For example, see Chris Micheli, “California Strengthens Sales/Use Tax Collections,”
State Tax Notes, Dec. 15, 2003, pp. 964-965.

StateStateTopTotalS & L TaxGSGRS & L TaxGSGRTax as
(italics=no incomeRateLocalRevenueRevenue% ofRank
tax)Rate($ millions)($ millions)Total
(a) ( b) (c) ( d) (e) (f) (g)
M o nt a na n/ a n/ a 3 , 0 2 0 0 0 . 0 % 4 8
Nebraska 5.500 2.000 6,875 1,648 24.0% 23
Nevada 6.500 1.250 9,764 3,321 34.0% 10
New Hampshiren/an/a4,51700.0%48
New Jerseya7.000n/a47,3086,85314.5%42
New Mexico5.0003.4386,9742,46935.4%9
New York4.0005.000123,66121,80217.6%38
North Carolina4.2503.00030,0136,78522.6%26
North Dakota5.0002.5002,36851021.5%29
Ohio 5.500 2.250 43,247 9,201 21.3% 30
Oklaho ma 4.500 6.000 11,257 3,186 28.3% 16
Oregon n/a n/a 12,403 0 0 .0% 4 8
Pennsylvania 6 .000 1.000 49,063 8,605 17.5% 39
Rhode Islanda7.000n/a4,68085418.2%35
South Carolina6.0002.00012,4443,28226.4%20
South Dakota4.0002.0002,24191440.8%5
Tennessee 7.000 2.750 17,240 8,206 47.6% 1
Texas 6.250 2.000 75,732 22,529 29.7% 14
Utah 4.650 3.600 8,283 2,421 29.2% 15
Vermont 6 .000 1.000 2,753 330 12.0% 46
Virginia 4.000 1.000 30,059 4,284 14.3% 43
Washington 6.500 2.500 25,169 11,813 46.9% 2
West Virginiaa6.000n/a5,8821,12619.1%34
Wisconsin 5 .000 1.000 22,300 4,395 19.7% 33
Wy o m i n g 4.000 3.000 3,136 803 25.6% 21
Sources: State and local sales tax rate data in Columns (b) and (c) are from the Sales Tax Institute and
are as of Sept. 1, 2008, [], visited Sept. 16,
2008. Columns (d) and (e): U.S. Bureau of Census. Column (f) and (g): author’s calculations.
a. Identifies the 10 states that do not have a local sales tax
Table 2 presents the sales tax rates for the 50 states and the District of Columbia
and includes the top local rate. Also reported in Table 2 is the reliance (as measured
by CRS) of state and local governments on the general sales (or gross receipts,
typically levied against the vendor) tax. Even though gross receipts taxes have more
in common with traditional business taxes, the Bureau of the Census has traditionally

combined them with general sales taxes.13 Depending on the state law and the
vendor, revenue generated by Internet transactions with out-of-state purchasers may
or may not fall under the gross receipts tax.14 State and local governments in
Arkansas, Louisiana, South Dakota, Tennessee, and Washington rely on sales tax
revenue for over 40% of total tax revenue.
Economic Issues
During the debate about so-called “streamlining” legislation, there are several
economic issues Congress may consider: (1) How will the SSUTA influence the
economic efficiency and equity of state tax systems? (2) What will be the impact of
changes in the treatment of Internet transactions on states that are more reliant on the
sales tax? (3) What will the potential revenue loss be, absent changes in the
treatment of Internet transactions? A summary of these issues follows.
Efficiency. A commonly held view among economists is that a “good” tax (or
more precisely, an efficient tax) minimizes distortions in consumer behavior.
Broadly speaking, economists maintain that individuals should make the same
choices before and after a tax is imposed. The greater the distortions in behavior
caused by a tax, the greater the economic welfare loss. A sales tax levied on all
consumer expenditures equally would satisfy this definition of efficiency. As noted
earlier, however, under the current state sales tax system, all consumption
expenditures are not treated equally. The growth of tax-free Internet transactions,
both business-to-business and business-to-consumer, will likely amplify the
efficiency losses from altered consumer behavior.
An alternative theory concerning economic efficiency in sales taxation is
referred to as “optimal commodity taxation.” Under an optimal commodity tax, the
tax rate is based on (or determined by) what is termed the price elasticity of demand
for the product (sometimes called the “Ramsey Rule”). Products that are price
inelastic, meaning quantity demanded is unresponsive to changes in price, should be
levied a higher rate of tax. In contrast, products that are price elastic should have a
lower rate of tax. If products purchased over the Internet are relatively more price
elastic, then the lower tax rate created by effectively tax-free Internet transactions
may improve economic efficiency as behavioral changes are reduced. However, the
price elasticity of products available over the Internet is difficult to measure and the
efficiency gain, if any, is suspected to be small.15

13 The Bureau of the Census also collects data on excise taxes and selective sales. We do
not report these receipts because they are typically collected at the wholesale level, not at
the point of retail transaction. For example, the gasoline excise tax is typically paid by the
carrier (tanker truck) at the point of collection (the end of the pipeline), not at retail sale.
14 Under a gross receipts tax (GRT), a vendor remits a designated percentage (e.g., 5% in
New Mexico) of monthly gross receipts (or sales revenue) to the state. A gross receipts tax
is different from the sales tax because the vendor — not the purchaser — is legally
responsible for paying the tax. Under the sales tax, the vendor acts as the collection agent
for the taxing jurisdiction and is not technically “paying” the tax; the buyer is paying the tax.
15 Equity has both horizontal and vertical components. A tax is defined as horizontally

An additional economic inefficiency arises if vendors change location to avoid
collecting sales taxes. The location change would likely result in higher
transportation costs. In the long run, it is conceivable that the higher transportation
costs would erode the advantage of evading the sales tax.16
For example, consider a Virginia consumer who wants to buy a set of
woodworking chisels. The local Virginia hardware store sells the set for $50
(including profit). An Internet savvy hardware store in Georgia is willing to sell the
same chisel set for $52 inclusive of profit and shipping costs. So, before taxes, the
local retailer could offer the chisels at a lower price. The marginal customer, who is
indifferent between the two retailers before taxes (even though the Internet is more
expensive, it is more convenient), is therefore just as likely to buy from the Internet
retailer as from the local retailer.17
Virginia imposes a state and local sales tax of 5.0%, thus yielding a final sales
price to the consumer of $52.50. Given the higher relative price inclusive of the tax,
the marginal consumer, along with many other consumers, would likely switch to
buying chisels from the Georgia-based Internet retailer (assuming these consumers
do not feel compelled to pay the required Virginia use tax on the Internet purchase).
The diversion from retail to the Internet in response to the non-collection of the use
tax represents a loss in economic efficiency. The additional $2 in production costs
($52 less $50) represents the efficiency loss to society from evading the use tax.18
Note that if in the absence of sales and use taxes, the Internet vendor in the
above example may yield to market forces and close up shop. However, if the
Internet vendor continues to operate even without the tax advantage, it could be the
case that consumers are willing to pay higher prices for the convenience of Internet
shopping. If this were true, then the higher “production costs” for Internet vendors
would not necessarily result in an efficiency loss.

15 (...continued)
equitable if people of equal circumstances pay equal taxes. A tax is defined as vertically
equitable if people with a greater ability to pay carry a greater tax burden than those less
able to pay. An optimal commodity tax would likely violate accepted principles of vertical
16 Dennis Zimmerman, “The Internet Sales Tax Debate: Sorting Through the Economic
Issues,” paper prepared for the 94th Annual Conference, National Tax Association,
Baltimore, MD, Nov. 8-10, 2001.
17 The pre-tax absolute price difference between the two retailers is unimportant. The
Internet price inclusive of shipping could actually be lower before taxes. The application
of the use tax makes the local retailer’s product relatively more expensive, regardless of
what the prices were before taxes.
18 Shipping costs can be thought of as a cost of production. The local retailer probably also
paid shipping costs to have the product on the shelf. Those costs are included in the price
of the good. Because the local retailer likely bought in bulk, the shipping cost per unit
would be considerably lower than the Internet retailer.

Equity. The sales tax is often criticized as a regressive tax — a tax that
disproportionately burdens the poor.19 Assuming Internet shoppers are relatively
better off and do not remit use taxes as prescribed by state law, they can avoid paying
tax on a larger portion of their consumption expenditures than those without Internet20
access at home or work. Consumers without ready Internet access are not afforded
the same opportunity to “evade” the sales and use tax. In this way, electronic
commerce may arguably exacerbate the regressiveness of the sales tax, at least in the
short run. As computers and access to the Internet become more readily available,
the potential inequity arising from this aspect of the “digital divide” could diminish.
Equity issues also arise with respect to businesses. Currently, local retailers are
required to collect sales taxes for the state at the point of sale. Internet retailers, in
contrast, are not faced with the administrative burden. Thus, two otherwise equal
retailers face different state and local tax burdens. In relatively high tax rate states,
this disparity may be significant. As noted above, consumers in these high tax rate
states have a greater incentive to purchase from out-of-state vendors, exacerbating
the tax burden differential.
Differential Effect Among States. The growth of Internet-based commerce
will have the greatest effect on the states most reliant on the sales and use tax. In
addition to having more revenue at risk, high reliance states also face greater
efficiency losses because of their generally higher state tax rates. As noted earlier,
higher rates drive a larger wedge between the retail price inclusive of the sales tax
and the Internet price and thus exacerbate the efficiency loss from the sales tax.
States with low rates (and less reliance) would tend to have a smaller wedge between
the two modes of transaction. States with both a high rate and high reliance would
tend to recognize the greatest revenue loss from a ban on the taxation of Internet
Based upon CRS calculations of state and local sales tax revenue as a portion
of total tax revenue, the state and local governments of Arkansas, Louisiana, South
Dakota, Tennessee, and Washington are the most reliant on the sales and use tax.21
In those states, over 40% of total tax revenue is derived from the sales tax; this result
is not surprising. South Dakota, Washington, and Tennessee do not have
comprehensive personal income taxes and Arkansas has a relatively high 11.5%
combined sales tax rate. Ordinal rankings of sales tax reliance appear in the last
column of Table 2. Note that six of the seven states with a sales tax and no income

19 A regressive tax collects a smaller percentage of income as income increases. Economists
will usually avoid normative questions of what is equitable because such a statement implies
an interpersonal comparison of utility.
20 Goolsbee and Zittrain (1999) found that the average Internet user had on average two
more years of education and $22,000 more in family income than non-Internet users.
21 In addition, those three states were well above the average state tax rate in the United
States of just over 5.3% (of the 45 states with a state sales tax and the District of Columbia).
The state tax rates for those three states were as follows: Washington, 6.5%; Florida, 6%;
and Tennessee, 7%.

tax are in the top 14 on the reliance index.22 The third column (c) of Table 2 reports
the highest local sales tax rate for those states that levy local sales taxes.
Revenue Loss Estimates. Economists Donald Bruce and William Fox
estimated in July 2004 that the “new e-commerce” loss in 2003 was approximately
$8 billion.23 “New e-commerce,” as measured by Bruce and Fox, is the lost revenue
from states not collecting the use tax on remote Internet transactions. This estimate
excludes purchases made over the telephone or through catalogs that would have
occurred anyway. An earlier Government Accountability Office (GAO) report
estimated that the revenue loss in 2003 from Internet sales would be between $1.0
billion and $12.4 billion.24 The wide range of the GAO estimate reflects the degree
of uncertainty on the size of the potential state and local revenue loss from e-
The Streamlined Sales and Use Tax Agreement
The entity that drafted the original Streamline Sales and Use Tax Agreement
(SSUTA), the Streamlined Sales and Use Tax Project (SSTP), was created in 2000
by 43 states and the District of Columbia. These states and the District of Columbia
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 retailers to those conducting trade over the Internet — could easily collect
and 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 SSUTA25
became effective on October 1, 2005. The latest amendments to the SSUTA were
approved June 18, 2008. The following is a brief description of the agreement as of
this writing.
Description of the SSUTA
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

22 New Hampshire and Alaska are not included in the seven because neither has a state-level
sales tax. Wyoming, the seventh, is 21st on the reliance index.
23 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.
24 U.S. General Accounting Office, Sales Taxes: Electronic Commerce Growth Presents
Challenges; Revenue Losses Are Uncertain, GAO Report OCE-00-165 (Washington: June

30, 2000), p. 21.

25 Jeffery A. Friedman and Charles C. Kearns, “Federal Streamlined Sales Tax Legislation
Introduced in Senate,” State Tax Notes, Jan. 16, 2006, pp. 131-136.

administrative burden of collecting taxes to ease tax collection for sellers. The states’
obligations under the SSUTA include the following requirements.26
Standard Definitions of Products. States participating in the SSUTA must27
define all goods in the same way. For example, in many states, food is exempt from
taxation, whereas candy is taxable. A common definition of candy (or food) must be
agreed upon to implement a streamlined sales tax regime. Each state retains the
choice over whether or not the item is taxable. Local governments in a state must use
the same tax base and definitions.
Simplified Tax Rates. In many states, local jurisdictions tax goods at
different rates. This complication is mostly remedied under the SSUTA, as each state
will be permitted only one state tax rate (with an exception for a second state rate on
food and drugs).28 Each state can add one additional local jurisdiction rate, based on
ZIP code.29 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.
Standard Rate Sourcing Rules for Cross-jurisdictional Sales.
Sourcing rules have not yet been finalized under SSUTA. It has been proposed that
for sales within a member state between local jurisdictions, the vendor would collect
the sales tax at the rate applicable for the vendor location. This is identified as
“origin” sourcing. For sales into a member state from an out-of-state vendor, the
vendor levies a tax at the agreed upon statewide rate applicable in the destination
state. This is identified as “destination” sourcing.
There is some debate about the “sourcing” aspect of the SSUTA. The single
statewide rate, which is set by each member state, would be a combined state and
local rate. If the combined statewide rate is the state rate plus an average of local
rates, it is possible that some consumers will pay a higher combined tax rate than is
required. It has been proposed that the member states would be required to include
a provision in the implementing legislation that would allow consumers that
“overpay” to receive a credit for overpayments.
Simplified Administration. 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.30 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.

26 For more information, see [].
27 Section 302 of the SSUTA.
28 Section 308 of the SSUTA.
29 Section 305 of the SSUTA.
30 Section 319 of the SSUTA.

Which States Are in the SSUTA?
As of this writing, 15 states were in full compliance with the terms of the
SSUTA and are identified as “members.” Another seven states are “associate
members.” Only the member states will have taxes collected by remote vendors.
The following is a listing of the status of SSUTA adoption in each state.
Member States. As of February 27, 2008, there were 17 member states that
have changed their sales tax laws to fully conform with the agreement: Arkansas,
Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey,
North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont,
West Virginia, and Wyoming.
Associate Member States. At present, five states have begun implementing
all the requirements of the project and are considered associate members: Nevada,
Ohio, Utah, Tennessee, and Washington. These five states will become full members
when they adopt into law all the rules and regulations that accompany full
membership. Other remaining states and the District of Columbia are participating
as advisors, but are not close enough to qualify as either full or associate members.
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). Colorado levies a statewide sales tax but has chosen not to participate.
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 support of the
National Governors Association (NGA). The NGA has endorsed the SSUTA with
hopes that the agreement will 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 will survive legal challenges. The official statement of the NGA follows:
Governors call on the federal government to enact legislation to require remote
vendors to collect sales and use taxes on sales of taxable products destined for31
each state adhering to the agreement.
The NGA support is shared by other state and local government organizations,
including the National Conference of State Legislatures (NCSL), the Federation of
Tax Administrators (FTA), and the Multistate Tax Commission (MTC).
Support also comes from large retailers who must collect sales taxes and believe
the current system provides an unfair advantage to Internet retailers who do not
collect such taxes. Many large brick-and-mortar companies with a strong Internet
presence generally comply with guidelines like those under SSUTA and generally
collect taxes on remote sales. Several retailers, however, are taking the middle

31 National Governors Association, “EDC-10. Streamlining State Sales Tax Systems,” Feb.

27, 2008. The policy position statement is available online at [].

ground in this debate. They understand the states’ desire to more efficiently collect
sales tax revenue in a fair manner, but they ask for greater simplification and
increased vendor compensation from the states for collecting state sales taxes.
Opponents of SSUTA legislation include state and local governments who feel
the administrative obstacles to streamlined sales taxes are too costly to overcome and
may actually exceed the potential revenue gain. These governments suggest that
increased compliance with use tax laws may better be achieved through elevated
consumer awareness and more enforcement activities. In addition, some business
groups maintain that the collection requirement, even with streamlining, would still
be too burdensome.
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.32 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.
SSUTA Legislation in the 110th Congress
In the 110th Congress, S. 34 (Senator Enzi) and the companion legislation in
the House, H.R. 3396 (Representative Delahunt), would grant SSUTA member states
the authority to compel out-of-state vendors in member states to collect sales and use
taxes.33 Both bills would respond to the Supreme Court’s recommendation in Quill
Corporation v. North Dakota 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 SSUTA to collect sales taxes from sufficiently large
businesses, even if those businesses do not have a nexus in the state. A “sufficiently
large business” is defined in the legislation as one with nationwide sales of greater
than $5 million.
Under S. 34 and H.R. 3396, Congress would grant authority to states to compel
out-of-state vendors to collect sales taxes, on the condition that 10 states comprising
at least 20% of the total population of all states imposing a sales tax have
implemented the SSUTA.34 The legislation also includes additional requirements for
administering the new sales tax system after the SSUTA adoption threshold has been
achieved. These requirements include, but are not limited to
!a centralized, one-stop multi-state registration system
!uniform definitions of products and product-based exemptions

32 Americans for Tax Reform, “The Streamlined Sales Tax Proposal: A Tax Increase Under
the Radar,” Policy Brief, Undated material available on the Internet at
[ h t t p : / / r .or g/ cont ent / pdf / 2005/ dec/ 120704ot _SST Ppb.pdf ] .
33 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
[ ht t p: / / smbi z/ hear i n gs / d a t abaseDr i ve nHear i ngs Syst em/
displayHearings .asp?congress=109].
34 S. 34, Sec. 4(a)(2).

!single tax rate per taxing jurisdiction with a single additional rate for
food and drugs
!single, state-level administration of sales and use taxes
!uniform rules for sourcing (i.e., the tax rate imposed is based on the
origin or destination of the product)
!uniform procedures for certification of tax information service
!uniform rules for filing returns and performing audits
!reasonable compensation for sellers collecting and remitting taxes
!simplification of telecommunication service taxes by member states
by July 1, 2010
The SSUTA includes these provisions, though some modifications to the SSUTA or
the legislation may be necessary for enactment.