Technology: Can State Sales Taxes be Simplified?

By CIOinsight  |  Posted 05-10-2006

Technology: Can State Sales Taxes be Simplified?

As the adage goes, there are only two things you can be sure of: death and taxes. But do you have any idea how difficult it is for your company to report its monthly state sales tax returns? It's probably more complex than you think.

Here's a scenario: If you're a retailer in Alabama with, say, a dozen stores in various cities and towns across the state, you must file a separate tax return every month to each city or town where each store is located, plus one uber-return to the state. Why? Because in the state of Alabama, as well as in Louisiana, Colorado and Arizona, the determination of sales taxes—as well as the processing of returns—is left up to the cities and towns themselves. So retailers have to keep on top of each region's particular tax code, which can vary widely because not all regions tax goods at the same rate—or even tax the same types of goods.

It gets even more complicated for goods that are shipped across state lines—often the case with Internet sales. For example, some states, like New York, charge sales taxes based on where the item is being shipped. But others, such as Ohio, collect taxes based on where the item is sent from. If that's not confusing enough, consider that each state not only determines its own rules about what gets taxes and by how much, but they also have their own definitions for particular categories of goods, like food, clothing and so on. In other words, what is considered a food item in one state may not be considered food in another. If you're a retailer with operations in many states, that creates a mountain of complexity. And mistakes can be painful: One error in a sales tax can lead to millions owed in back taxes and interest fees—and that doesn't look pretty on an annual report.

At least one organization is working to reduce the complexity in the determination of state sales taxes. The Streamlined Sales Tax Governing Board, located in Washington D.C., has convinced 19 states to agree to adopt its Streamline Sales and Use Tax Agreement, which aims to simplify and modernize sales tax and administration across all 50 states and Puerto Rico.

Although the Board officially organized in October 2005, it has been meeting since March 2000, says Scott Peterson, executive director of the SSTGB. "We started by asking large American businesses—retailers, telecom companies, manufacturers and so on—to tell us what sales tax issues created unnecessary costs for them when they conduct business in more than one state." Peterson used that data to draft the current tax agreement, addressing such issues as the need for nationwide definitions of goods classifications and reducing complexity. "It's not a model law, but more of a roadmap to what we thought might make a simpler and more uniform system amongst the states," he says.

But getting every state to sign on will take a lot of work, he admits. Part of the reason for the slow adoption is that the agreement requires states to conforme to a destination-based system—one that collects taxes based on where goods are shipped. "That means some states will have to completely change their sales tax code, increasing the burden on retailers for the sake of overall simplicity," he says.

Next page: The Technology Angle

The Technology Angle

How does technology fit into all of this? The SSTGB has chosen to endorse a select group of tax-processing outsourcers that can manage companies' complex tax issues. Peterson says that in some cases, state governments will offer financial assistance to companies, because it will ultimately reduce the cost of state auditors who often spend months reviewing errors companies make in tax collection.

Sounds good, but if computers can automate the process, why bother simplifying it? Peterson admits that "there is too much truth to that question," but adds that complexity in computer programming is never a good thing, either. "It just doesn't make sense to have a rule that's overly complicated, like making clothing taxable on the first Tuesday of the month as long as it doesn't cost more than $100. Automating that requires so much programming and such a greater chance of error that it creates an undue burden," he says. "If we can simplify the code, the systems will experience fewer errors, and we can hopefully get to a point where the states are not spending as much money on auditors."

Peterson realizes that trying to get every state to agree on a single set of tax laws is probably not realistic. For now, the organization is focusing on creating nationwide definitions of goods categories, and working to get the support of influential states like New York, Florida, Texas and California. "But it will take a lot more politicking," he says.