Help on the Sales-Tax Front

Article excerpt

The Association of Washington Cities has called the Streamlined Sales Tax Project the "most divisive issue within the city family in 25 years." The National Association of Counties has dubbed the issue one of its key legislative priorities for 2005. The National League of Cities is expending great effort in lobbying Congress to pass legislation to ensure fair and appropriate revenue streams to local governments. And the Metropolitan Mayors' Caucus of Greater Chicago (322 local governments) has called upon Congress to support this legislation to ensure the viability of the sales tax as a state and local revenue source.

At ICMA's annual conference in October 2004, the ICMA Government Affairs and Policy Committee sponsored a session to update members on the national effort to simplify the system of sales and use taxes, which covers sales made whether through online shopping or in a store. Presenting at the session were Don Borut, executive director of the National League of Cities, Washington, D.C., and Flip McConnaughey, chief of staff to U.S. Senator Mike Enzi of Wyoming, who was the prime sponsor of S.F. 1736, the Streamlined Sales and Use Tax Bill, during the 108th session of Congress. Senator Enzi is preparing to reintroduce the legislation this year.

The federal legislation would level the playing field for the payment of sales and use taxes by e-commerce companies and by "bricks and mortar" businesses. Forty-two of the 45 states that impose a sales or use tax have already agreed that this is good policy because it stops the erosion of the sales-tax base caused by consumers' not paying sales taxes for online and catalog purchases.

Such erosion has already accounted for a noticeable financial loss in some cities and counties. For example, Catawba County, North Carolina, estimates that it will lose $2 million this year in sales-tax collections because Internet and catalog sales are not being taxed. This translates to $200 million to $300 million lost by all localities in North Carolina, while the state coffers will lose $300 million to $400 million--and that's just one state.

McConnaughey indicated that, according to recent studies, Internet sales are projected to total 10 percent of all sales by 2008, which will mean that $230 billion in annual sales will go untaxed if this legislation is not passed.

Interest groups representing Main Street businesses, as well as those representing big players like Amazon and eBay, also are working toward passage of the Bill. They see simplifying the administration of sales taxes as good for business over the long term. The bill names a targeted implementation date of October 2005.

Concerns about this legislation have surfaced primarily because of attempts to amend S.F. 1736 with provisions concerning telecommunications taxes and the business activity tax. Unhappily, such amendments have only served to confuse the issue and wrap too many diverse tax-policy issues into one bill.

Even without amendments, the legislation has not won the uniform support of state and local governments. Sales-tax simplification means developing a more uniform method of taxing sales from place to place, but to get to a uniform system from the current set of individual state and local sales-tax systems requires change that some would prefer to avoid. Three key features of the proposed uniform sales-tax system are 1) uniform definitions of taxable goods and services, 2) rate simplification, and 3) uniform sourcing rules. At issue is the fact that these changes would affect local governments in various ways.

For example, the new policy requires using the tax rate of the delivery destination, rather than the rate effective at the point of sale. In the state of Washington, this shift to destination-based sourcing is predicted to result in 94 cities' losing revenue and 184 cities' gaining revenue, according to Christopher Swope (Governing magazine, April 2004, p. …