If someone asked you to explain streamlined sales tax, could you? Probably not, but you'll be able to soon. This post will explain what streamlined sales tax is, how it came to fruition, what it does, and who it was designed to help.
To start, let's talk about sales tax laws in general.
Sales Tax is Complicated
Several things contribute to the brain-bending complexity of sales tax laws, most notably:
- There are over 12,000 US state and local tax jurisdictions
- Tax rules and product categories vary from state to state
- All tax rates and rules are subject to change at any time
Last but not least, the concept of economic thresholds, introduced as a result of the South Dakota v. Wayfair ruling this June, brought a slew of new complexities to the table.
The Supreme Court Case, South Dakota v. Wayfair, completely changed the nexus laws surrounding a state's ability to collect sales tax on online (and offline) interstate transactions.
The outcome of this ruling affected any seller who does significant interstate business, including internet retailers. And unfortunately, it also made identifying nexus obligations - an already difficult task - even more complex.
Want to learn more about the South Dakota v. Wayfair case? Read this post.
Why Economic Nexus is So Messy
States are all eager to get laws in place so they can start collecting revenue. Unfortunately, there's quite a bit of legislation variation from state-to-state.
However, most states have used some variation of the following criteria to define their economic nexus threshold:
A). Sell at least $X dollars into a state
B). Complete at least X transactions in a state
While that sounds easy enough, it gets convoluted as you dive into the details. For example, some states require criteria A or criteria B. Others require that you meet both criteria A and criteria B. Just to make sure rules are clear as mud, some states base nexus on gross sales, while some consider gross revenues. And while some states don't consider exempt sales, many do.
If you're an online retailer with economic nexus in multiple states, how can you be expected to keep your sales tax obligations straight? Enter Streamlined Sales Tax (SST).
Streamlined Sales Tax Basics
The goal of SST is to provide a framework for states to follow when structuring nexus laws in an effort to help relieve undue burden on businesses. In essence, SST is a framework states can opt to comply with that makes it easier for business owners to manage tax obligations.
Introducing a shared structure is helpful to states as well, because it takes some of the legwork out of defining new nexus legislation.
A Brief History Lesson
Interestingly, SST is not new. Without going into too much detail, The Supreme Court heard two prior cases where they were asked to consider allowing remote sales tax collection. The court denied these requests, stating that collecting tax from remote sellers was too complicated to enforce.
In response, two groups set out on a mission to try and make the sales tax system easier for businesses to navigate in 1999. The following year, Streamlined Sales Tax Governing Board came together, determined to find ways to make sales tax compliance less complicated; and the SSUTA was born.
In regards to the SSUTA, the Streamlined Sales Tax Governing Board website says:
"The purpose of the Agreement is to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance. The Agreement focuses on improving sales and use tax administration systems for all sellers and for all types of commerce through all of the following:"
- 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.
- Simplified administration of exemptions.
- Simplified tax returns.
- Simplification of tax remittances.
- Protection of consumer privacy.
Read more about the Streamline Sales Tax Governing Board.
Which States Participate in SST
Currently, twenty-four states follow the guidelines created by the SSTUA. These states must all be compliant with the ten SST commandments listed above, but they still have the authority to decide what's taxable and what is exempt in their state.Tennessee is an associate member state, meaning that it opts into some, but not all, of the SST tenants.
Most states opted into SST in 2005, shortly after the governing board was established. Since then, it hasn't gotten much attention; primarily because while helpful, there wasn't much incentive for states to participate.
Today, SST plays a much bigger role in helping simplify sales tax compliance for business owners. Why? In a 1992 case, Quill v. North Dakota, the court was petitioned to approve interstate sales tax. That case led to the birth of the physical presence nexus stipulation that was overturned this year, due in large part to the fact that sales tax law is so complex and burdensome to business owners.
SST's Role in South Dakota v. Wayfair
With the insane growth of ecommerce, the issue of taxing remote sellers could no longer be ignored. And based on the Quill ruling and it's outcome, it's safe to assume the progress that SST has made in bringing uniformity to sales tax laws played a role, and South Dakota's participation in SST positively swayed the court's decision. And the SST governing board agrees.
In a statement released just one day after the June 20th ruling, the governing board said, *"We applaud the U.S. Supreme Court’s decision in South Dakota v. Wayfair for removing the physical presence requirement and recognizing that South Dakota and similarly situated states have removed the “undue burdens” with which the Court was concerned in its 1992 Quill decision."
Now, let’s address the question you’re dying to know the answer to.
Will SST Help Your Business?
At this point, probably not. Many small and midsize companies felt panic as the ruling on remote sellers came down, and for good reason. A large percentage of these businesses don't have the budget necessary to manage complicated interstate sales tax compliance. And unfortunately, as of today, SST doesn’t really make it any easier.
Right now, businesses are able to remit sales tax for all member states through the Streamlined Sales Tax Registration System (SSTRS). And while that sounds great, the only companies who really benefit are those that are willing to register in all twenty-three SST member states. For small retailers who do little to no business in 17 of those 23 states, using the SSTRS significantly complicates filing, rather than making it easier.
We fully expect SST to continue to pop up in sales tax conversations as interstate sales grow and as additional states pass economic nexus legislation. In the future, we hope the system will evolve to better support various types of businesses. For now, it has a ways to go.