By Catherine Hubbard, CCH Washington Staff Writer

The Streamlined Sales Tax Project's (SSTP) efforts to tax Internet sales could end up stymieing technological innovation and impede states' rights to set their own tax policy, according to Colorado Gov. Bill Owens (R). Speaking at a June 11, 2003, Cato Institute forum in Washington, D.C., Owens criticized the proposed project, which seeks to create a national compact to harmonize sales tax rules, eventually leading to taxes on online sales.

"Under the guise of simplification, this plan would fundamentally alter the retail landscape in America and change the nature of digital commerce," he cautioned.

The Supreme Court in Quill Corp. v. North Dakota ruled that remote retailers do not have to collect and distribute sales taxes to the approximately 7,500 different tax jurisdictions. But it also said states could collect the taxes if they first simplified the existing system. Under the project's legislative model, participating states would develop uniform product codes, harmonize definitions of what is taxable and simplify the collection system. The project is headed by the Federation of Tax Administrators, the U.S. Conference of Mayors, National Conference of State Legislatures (NCSL), the Multistate Tax Commission and the National Governors' Association, of which Owens is a member.

Owens said the project is an attempt to impose a "national sales tax cartel" on consumers. A tax on Internet sales would raise $440 billion in additional revenue for states over 10 years, he said. "This is not just a nickel-and-dime tax," Owens said. He also warned that if states create this new tax system, it would still be in place even after the recession. "Once we make this public policy, we will have it forever." Owens said the proposed governing board would be given legislative, judicial and administrative powers over states. "Oversight and implementation of a significant portion of your state's tax policy would be ceded to an unelected out-of-state bureaucracy."

Supporters of the proposal say the plan would be more fair to brick-and-mortar businesses that already collect and remit sales taxes to states. But Owens countered that local retailers take advantage of more government services, such as roads, compared with Internet retailers.

If enough states (encompassing at least 20 percent of the population in sales taxing states) participate in the project, then Congress could write a law requiring all remote retailers to collect and remit sales taxes. So far more than 30 states are participating in the project. SSTP leaders have said that more than 10 states have enacted legislation implementing the agreement, but the 20 percent threshold has not been met. They anticipate enough states will enact implementing statutes this year to trigger the project's agreement.

The SSTP would put in place a bureaucratic system that would dictate what states could tax and at what rate, Owens said. He unveiled a report, "Nine Problems with Taxing the Internet: Questions Governors and Legislators Must Consider," from his newly formed group, the Center for the New American Century, which states that the system will "negate one-third of President Bush's federal income tax cut of 2001." The Colorado-based think tank said the new system would not simplify sales taxes. "SSTP would preserve many of the current complexities of calculating and collecting sales taxes and add new ones," it said. "A merchant will have to calculate up to 7,500 different tax rates on transactions to consumers."

State Group Defends Project

NCSL director of communications and interstate commerce Neal Osten told CCH on June 17 that Owens' report is flawed. "The report is filled with inaccuracies and misstatements," he said. On the one hand, he said, the group complains that the SSTP would rob states of their rights to set tax policy. But it also says the project would not simplify sales taxes, since localities would still be allowed to set their own rates and to tax food and medicine, even if those items are exempt under state policy. "It's totally inconsistent," said Osten.

The SSTP agreement would not require one, nationwide rate. Instead, it would ask states to adopt a rate that is consistent across products. Osten noted that many states have different rates for different items, such as food and clothing. States can decide what types of items to tax and, more to the point, decide whether to join the project at all, he said. "The sovereignty is still there."

The agreement would not lead to a new tax on Internet-related sales of goods, Osten said, noting that consumers are already required to pay a user fee for items they purchase from remote sellers. "The tax is already in place." The agreement would only create a simplified system for collecting the sales taxes, which responds to the concerns the high court raised in Quill, he said.

Colorado has one of the most complicated sales tax systems in the country, with separate rates and taxable items in each city and county, said Osten. It is unlikely the state will be able join the compact, but there is no reason for the governor to be critical of the project's application to the rest of the country, he said. He noted that Louisiana, which has local parishes with different sales tax schemes is participating in the project.

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