It was in this environment, and with this realization, that Governor Leavitt addressed the annual meeting of the Multistate Tax Commission in Dana Point, California. He outlined the challenges facing the sales tax and the competitive disadvantage that burdened Main Street businesses. He noted that the issue was very simply whether or not the sales tax would remain a viable source of revenue for state governments in the 21st Century. He challenged the states to work together to simplify their sales tax systems, in the hope that the burden on interstate commerce presented by the current morass of thousands of jurisdictions with their own tax bases, rates, exemptions, and procedural requirements could be dramatically reduced. With dramatic simplification, in would not be unreasonable for Congress to determine that a collection requirement could legitimately and appropriately be imposed on an internet retailer exploiting the market of a state.
The states of Idaho, Utah and Washington took up the challenge. Val Oveson, Chair of the Utah State Tax Commission, Mike Southcombe, Chair of the Idaho State Tax Commission, and Fred Kiga, Director of the Washington State Department of Revenue agreed to commence the Northwest Regional Sales Tax Project.5
Structure of the Project
The states immediately recognized the necessity for input from business leaders. Various businesses were identified that were thought to be progressive in outlook, innovative in marketing and that did business in at least two of the three states. Representatives of these businesses were invited to participate in focus groups held in the various states, Seattle on November 4, 1998, Salt Lake City on November 9, 1998, and Boise on November 23, 1998. Many of those business leaders, recognizing the benefits that could accrue to all parties from a better sales tax system, agreed to participate. Thus, the Northwest Regional Sales Tax Pilot Project was established as a public/private partnership. A partial list of the participating business representatives in attached as Appendix A to this report. Invaluable technical and strategic assistance was provided by Dan Bucks of the Multistate Tax Commission and Harley Duncan of the Federation of Tax Administrators and their staff.
The first regional meeting was held December 15, 1998, in Salt Lake City. At that meeting, three task forces were established, one on tax rates, one on tax base and one on filing and procedure. In keeping with the public/private partnership focus, each task force has a government and an industry co-chair. Recognizing the importance of technology in sales tax compliance and administration, a technology task force was later added. The task forces engaged in numerous conferences, both in-person and by telephone.
Additional regional meetings, where the progress of the task forces was reported and overall strategy was discussed, were held in Boise on April 22, 1999, Seattle on May 17,1999, Post Falls, Idaho on August 27,1999, Salt Lake City on October 5, 1999, and Seattle on February 24, 2000. The rate task force substantially completed the work assigned. The tax base task force, on the other hand, recognized that the exemption issue merited its own task force. Accordingly, the rate task force was replaced by a resale and exemptions task force.
The Mission of the Project
Much of the then current discussion on sales tax simplification had been focused on the internet and other forms of remote commerce. Concern by traditional retailers about competition and by states about potential revenue losses motivated those discussions. Early on, however, the Project recognized that remote commerce is only part of the problem. In fact, the sales tax systems of the various states are too complex for all taxpayers. Those taxpayers who currently have taxable nexus with the participating states have existing problems that must be addressed, regardless of the ultimate resolution of any e-commerce issues. Accordingly, the Project aimed at simplifying the sales tax for all stakeholders, as set forth in its Mission Statement: Develop a fair, simplified sales tax system that works well in all major marketplace circumstances for sales and use taxpayers doing business in the tri-state region.
The accomplishments were many and varied. Some were intangible. Some were practical.
- Relationships. One of the most striking outcomes of the Project was the high level of cooperation and communication that developed between the government and business participants. At the outset, many government representatives had only a vague idea of the practical difficulties of compliance. After the Project, those representatives had a much greater awareness of the difficulties many retailers face in complying with the sales tax. This knowledge later informed the structure and function of the Streamlined Sales Tax Project.
Similarly, some business representatives did not understand why some government processes were helpful or necessary. Much information was shared and both government and business representatives have a clearer idea of the challenges facing the other. Moreover, all representatives came to view the issue as a joint problem that can only be solved cooperatively.
- Research and development. The participants conducted extensive research and fact finding into the sales tax systems themselves and into taxpayer and third-party compliance systems. This research was critical in developing the concept of a “trusted third party” who could relieve the retailer of many of the obligations of collecting and remitting sales tax. This concept was later incorporated in the National Governor’s Association proposal to the Advisory Commission on Electronic Commerce which, in turn, became the Certified Service Provider, a centerpiece of the Streamlined Sales Tax System.
- Combined EFT in Idaho and Utah. One of the very practical difficulties taxpayers face is the varying requirements for electronic funds transfers in payment of tax liabilities. Utah and Idaho, who currently use a common EFT vendor, were able to work together to allow “one stop shopping” for both states. Thus, a taxpayer can authorize EFT’s to both states with a single contact.
- Washington’s combined exemption certificate. Washington had recently inaugurated an Electronic Filing System (“ELF”) for its excise taxpayers. That system predated the Project, but has now been augmented by a combined exemption certificate that will simplify compliance for all of Washington’s excise taxpayers, including its ELF filers.
- Idaho’s electronic filing system. Idaho, after viewing Washington’s ELF system and other presentations from third-party vendors, initiated its own electronic sales tax reporting system. Idaho’s extensive work on the technology task force was the decisive element in this decision.
- Legislative support. All three states have received the support of their legislatures, as indicated by passage of the following bills:
- Utah Senate Bill 178 (1999). This bill authorized the Utah State Tax Commission to participate in the Project.
- Idaho House Bill 354 (1999). This bill authorized the Idaho State Tax Commission to participate in the Project.
- Washington House Bill 2493 (2000). This bill represents one of the most practical and concrete accomplishments of the Project. Given the current reality of multiple local tax rates, taxpayers have had extreme difficulty keeping up to date on changes in rates and jurisdictions. Under the law as now amended by this bill, local sales tax bases and rates may change only four times a year, with at least 75 days notice to the Department of Revenue of such changes. This limitation applies whether the changes occur as a result of ordinances or annexation. Thus any Washington taxpayer will have a single source for researching all such changes and must make the inquiry only four times a year. Moreover, if there are changes, taxpayers will have adequate time to change their systems to comply.
- Utah Senate Bill 209 (2000). This bill is functionally identical to Washington Bill 2493 and arose out of uniform legislation proposed by the Project. As such, it gave the same protections to Utah taxpayers that Washington taxpayers will now enjoy. (Idaho is virtually a one-rate state and, accordingly, did not need such legislation.)
- Utah Senate Bill 172 (2000). This bill provided a single statewide sales tax rate that retailers may collect if they have no nexus with the state. In return for voluntary collection at that rate, retailers received protection from audit exposure if they were ultimately found to have nexus. Such retailers could be fully compliant with Utah sales tax law by filing a single return for each period, with a single tax base and a single rate. Although the new law provided no immediate benefit to Project participants, most of whom have nexus in Utah, passage of the bill represented the Legislature’s support for Project initiatives and its increasing willingness to address the complex issues surrounding sales tax simplification.
- Conclusion. The Northwest Project broke important ground in business-government cooperation in addressing the difficulties of sales taxation of interstate commerce. It laid the groundwork for national initiatives that would follow. The Project ended, not because its work was done or because any of the participants lost enthusiasm for the work. Rather, the work of the project was superseded by the Streamlined Sales Tax Project, a national initiative that was inspired and informed by the success of the Northwest Project.