By Catherine Hubbard, CCH Washington Staff Writer

The Streamlined Sales Tax Project is gaining momentum, but it lacks the level of participation it needs to become effective, according to a panel that spoke on May 21, 2003, at a D.C. Bar luncheon in Washington, D.C. The goal of the project is to get the individual states to standardize their definitions of taxable products and services, simplify the rates charged, and allow collection across state lines.

So far, the project is about halfway toward its goal of having at least 10 states signed on, representing at least 20 percent of the total population, according to Harley Duncan, executive director of the Federation of Tax Administrators.

It looks like the project will have no trouble getting enough states to comply, but the question now is whether those states will contain a large enough percentage of the population. Duncan said that although 9 states have enacted conforming legislation (as of May 21), those states contain too few people to get the project to its goal. "Nobody lives in those nine states," he quipped, referring to Arkansas, Indiana, Kentucky, Nebraska, North Dakota, South Dakota, Utah, West Virginia and Wyoming.

In addition, Kansas, North Carolina, Minnesota and Oklahoma have a "good prospect" for enacting conforming legislation, he said, noting that those states have acted on simplification proposals. The total population for the 13 states is about 14.1 percent of the nation, he said. In all, 30 states support the agreement, with about half working on legislative changes, he said. "This is the first heavy lifting in the state legislative process."

Moreover, even if all the small states with sales taxes enact legislation in substantial compliance with the agreement, they would include only 20.3 percent of the population, said Stephen Kranz, tax counsel for the Committee on State Taxation, Washington, D.C. Therefore, the project could use the support of larger states, such as California, Texas and New York, said Duncan. He added, however, that "prospects there are not particularly great." The project is working closely with Michigan, New Jersey, Ohio and Pennsylvania, he said.

A sticking point for some states is the agreement's sourcing rule, said Kranz. The project calls for destination-based sourcing, which places the tax at the location where the item is received and used. But states with origin-based sourcing, such as Washington, Texas and Illinois, are concerned about losing tax income during the transition if they switch to a destination-based system. "The localities didn't want to face the revenue shift," said Kranz. He noted that although Washington has enacted streamlined legislation, the law is not conforming because of the sourcing rule.

Duncan said he hopes the project will encourage Congress to authorize states to require remote sellers to collect taxes on goods and services they sell into a state. Such a law would override the Supreme Court's decision in Quill, which held that requiring remote sellers to collect sales taxes would place too great a burden on retailers. He noted that small retailers with sales that fall below a certain threshold would not be affected.

A key goal of the project is to encourage states to adopt uniform definitions of items such as food, drugs, medical devices and tangible personal property, said Duncan. The project is also pursuing a uniform definition for digital property, he said. States could choose which categories they want to tax, but would "define it the same way," he said. The project also hopes to establish an easy-to-use database to help retailers determine their customers' appropriate tax rate in any jurisdiction, he said.

The agreement also includes structural simplifications, including elimination of separate taxing jurisdictions, which would affect Louisiana, Alabama, Arizona and Colorado if they join, Duncan said. Kranz added that "there's a good chance Alabama will conform" to the agreement. He noted that Wal-Mart "gets four or five knocks on their door every day" from states like Alabama.

Also at the luncheon, Janet James, deputy general counsel for the District of Columbia Office of Tax and Revenue, said D.C. hopes to participate if enacting streamlined legislation would not lower revenue.

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