Tennessee and the Streamlined Sales Tax Project (SSTP) Presented to the TACIR Nashville, Tennessee February 7,2011 By Stanley Chervin, Senior Research Associate

Inability to Require Remote Sellers to Collect Sales Tax National Bellas Hess Inc. v. Illinois Department of Revenue (1967) Quill Corporation v. North Dakota (1992) Result: Without a physical presence in a state or nexus, states have no legal authority to required remote sellers to collect state or local sales taxes.

Inability to effectively collect Tennessee Use Tax from households and some businesses The Use tax complements the Sales tax (1947 for both) in order to ensure collection of the tax on merchandise purchased from out-of- state sellers who do not collect the sales tax. In such cases, the buyer has a legal responsibility to remit the tax to the Department of Revenue. The Department of Revenue provides a consumer use tax form (SLS 452) that households and businesses can use to report and pay any use tax due. While many Tennessee businesses are audited each year to insure proper payment of both the sales and use tax, many unaudited businesses and most households for obvious reasons are not. In 2009, individuals filed 1,376 use tax returns and paid $1,746,111.

TENNESSEE AND THE SSTP States invited to work together by the NCSL, NGA, FTA, and MTC to work together to simplify sales taxes. Organized in 1999 & 2000 with participation by 44 states and the District of Columbia. Participating states called SSTIS (Streamlined Sales and Use Tax Implementing States). Tennessee played an active role in the development of the SSTP including leadership roles in the Streamlined Sales Tax Project Governing Board. Its active role reflects a combination of leadership decisions to participate in the project and some very obvious but sometimes overlooked or forgotten fiscal realities.

Greatest Combined State and Local Tax Dependence On General Sales Taxes (2008 Census Data) 1Tennessee 46.3% 2South Dakota 40.1% 3Arizona 39.6% 4Louisiana 39.6% 5Arkansas 39.5% 6Hawaii 38.9% 7New Mexico 35.7% U. S. Census data adjusted

Highest combined average state and local sales tax rate: 9.41%

Source: U. S. Census

Source: U.S. Census:, QUARTERLY RETAIL E- COMMERCE SALES 3rd QUARTER 2010 Growth in Remote Sales

1.State and local sales tax revenue loss for all states is estimated at $11.4 billion by Projected 2012 state and local sales tax loss for Tennessee is estimated at $410.8 million. 3.Total loss for Tennessee between 2007 and 2012 is estimated at $ 1.9 billion. 4.Estimated 2007 losses in Tennessee represent 3.04% of actual 2007 state and local sales taxes, fifth highest of the 47 states (includes DC) analyzed. Budgetary impact (of the loss) in Tennessee forecasted to rise to 4.8% of actual collections by Significant Lost Revenue From E-Commerce Only Source: Bruce, Fox, and Luna: State and Local Government Sales Tax Revenue Losses from Electronic Commerce, April 2009.

1.State and local sales tax revenue losses for all states is estimated to reach $23.3 billion by Projected 2012 state and local sales tax loss for Tennessee is $748.5 million. Estimated Losses from all Untaxed Sales (E- Commerce plus other types of remote sales) Source: NCSL interactive map at

SSTP Goals State level administration of sales and use tax collections. Uniformity in the state and local tax bases. Uniformity of major tax base definitions. Central, electronic registration system for all member states. Simplification of state and local tax rates. Uniform sourcing rules for all taxable transactions. Source: SST Governing Board website: p?page=About-Us

SSTP Goals Simplified administration of exemptions. Simplified tax returns. Simplification of tax remittances. Protection of consumer privacy. Source: SST Governing Board website: p?page=About-Us

SSUTA Conformity Requirements Common state and local sales tax base within a state (over 30 states impose both state and local sales taxes) A single state rate (few exceptions such as food) A single local rate in each jurisdiction (easily mapped) Uniform destination sourcing rule for goods and services but with an alternative for intrastate sourcing under certain conditions

SSUTA Conformity Requirements Uniform sourcing for telecommunications Uniform product definitions Reasonable vendor compensation (a clear requirement in seeking federal legislation)

Streamlined State Status Full Member States Associate Member States – flex to full Advisory States – Not Conforming Non-sales tax states Non-participating state Source: Streamlined Sales Tax Governing Board Project states – Not Advisory ME

Tennessee Conformity Changes Adoption of most conforming definitions. Creation of a jurisdiction boundary database (for use by remote sellers for establishing local sales tax rate). Establishing a central registration system. Telecommunication sourcing rules. Uniform remittance and recovery of bad debt procedures. Providing SSUTA amnesty provisions. Uniform sales tax holiday definitions and procedures.

Tennessee Hurdles to Full Conformity Destination sourcing rule needs to be readdressed in Tennessee. Optional origin sourcing now available under certain circumstances. Single article limitation (local and state) must be ended (not allowed under SSUTA except for motor vehicles, watercraft, aircraft, and modular, manufactured and mobile homes). Special sales tax rates (different than standard rate) levied on a small group of items in Tennessee must be repealed. These will be replaced with special privilege taxes (in lieu of sales taxes).

Tennessee Hurdles to Full Conformity Uniform sourcing rules for telecommunication service will result in some redistribution of local sales taxes; actually back to method used in late 1990s. Vendors Compensation must be provided to both remote and instate vendors. Additional taxpayer education by DOR needed before full implementation.

Congressional Hurdles Remaining Congress facing significantly more important issues at current time. New composition of Congress may frown on what some consider a tax increase. Congressional interest and involvement must be maintained, and this will require continued momentum by the SSTP. Issue of appropriate level of vendors compensation and deminimus rule amount, although both issues recently addressed in SSUTA, must satisfy Congress.