Businesses depend on the public services tax revenues pay for: roads that facilitate deliveries, courts where firms resolve legal disputes and regulators that help protect businesses from fraud. Even businesses eager to pay their share, however, may feel that complying with tax laws is complicated.
Economic nexus and marketplace facilitator tax policies rolled out following the 2018 South Dakota v. Wayfair ruling have made tax compliance challenges highly visible. Struggles to understand and fulfill tax obligations are not new — states have worked for decades to manage these compliance difficulties. The National Conference of State Legislatures (NCSL) and National Governors Association (NGA) convened in 1999 to seek methods of making state tax systems easier for interstate businesses to comply with and understand. This resulted in the Streamlined Sales and Use Tax Agreement (SSUTA).
The 2018 Wayfair ruling turned eyes back to SSUTA nearly two decades after its launch, and this month’s Deep Dive examines whether it can alleviate today’s compliance strains.
SSUTA’s Role in South Dakota v. Wayfair
Twenty-three states have joined SSUTA to date as full members, while a 24th state — Tennessee — is an associate member due to its compliance with most but not all of the provisions. SSUTA participants agree to take various policy simplification steps, including adopting common definitions for product categories such “candy” and “soft drinks” in order to be more united in state and local tax rates. Tax rate simplification typically means that each municipality applies one tax rate to all sales regardless of product type, and that each state either uses a single sales tax rate for all products or one rate for most categories and a separate rate for food and medicine sales. Member states still retain the ability to set independent tax rates and tax-exempt products.
Such best practices are currently under high scrutiny following Wayfair. The Supreme Court offered no explicit outlines for a legally acceptable remote seller tax policy when it ruled to enable such laws in the Wayfair case. The court did cite South Dakota’s SSUTA membership when allowing South Dakota’s online sales tax law to stand. The ruling permitted South Dakota’s law in part because — thanks to SSUTA and other elements — the policy did not seem to “discriminat[e] against or [put] undue burdens upon interstate commerce.”
The court highlighted South Dakota’s SSUTA participation but stopped short of requiring other states to follow suit in crafting their own economic nexus laws. Joseph Bishop-Henchman — a counsel at law firm McDermott Will & Emery and, until recently, executive vice president of U.S. tax policy think tank the Tax Foundation — said states that enact remote seller taxes without also simplifying their sales tax systems are “under a cloud of legal uncertainty.”
States and localities are still guessing what constitutes permissible economic nexus or marketplace facilitator tax laws, and many sellers are concerned about the expense and confusion of sorting through jurisdictions’ varying definitions, rates and other policy details. The American Case Management Association (ACMA) — an interstate retailer group with a history of fighting state tax laws — highlighted such compliance complaints in a recent report, stating that too many states fail to provide sufficient support for businesses trying to adjust to new requirements.
Where SSUTA Does — and Does Not — Ease Remote Sales Tax Compliance
SSUTA membership presents one path forward to compliance simplification. It reduces the variance of different states’ tax laws and provides businesses with supports if they register with an associated program. These aids include CSP assistance with administration, calculation and remittances. Free CSP services may also go to businesses that opt to pay remote sales taxes prior to being legally required to do so, have in-state economic participation below certain levels and follow certain registration requirements.
SSUTA’s benefits have not won it many new members, however. The District of Columbia and 43 states had passed economic nexus sales tax laws as of late October — a figure nearly double the 24 SSUTA participants. Several states have instead taken alternate approaches to simplification. Alaska’s lack of a statewide sales tax holds it back from membership, and local jurisdictions are instead exploring creating an intermunicipality commission to handle tax collection and administration. Pennsylvania and Virginia seem to have taken a leaf from SSUTA’s playbook, with the former reportedly seeking to furnish businesses with software-based compliance assistance and the latter legally requiring its tax commissioner to streamline remote seller tax compliance.
No states have joined SSUTA in the year and a half since the Wayfair ruling, and Ohio’s 2014 membership is the most recent addition. The reasons why there has not been new uptake are unclear, but it must be noted that SSUTA does not yet offer guidelines or answers to many of the questions hanging over economic nexus and marketplace facilitator laws. The agreement does not inform members of the thresholds below which businesses should be exempt from remote sales tax and does not clarify how to administer taxes on firms that cross said thresholds midway through a tax year.
SSUTA has helped make compliance easier for businesses with physical presences in multiple states and retains the potential to do the same for businesses that remotely participate in many states. The agreement’s provisions reduce some of the differences between state tax policies and correspondingly some of the difficulties of abiding by them. Many questions still remain over how to enact economic nexus policies, and the notable lack of new SSUTA participants could indicate that the agreement needs updating to reflect new tax realities and needed supports.