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CONTACT: Patrick Ross
May 2, 2005
(202) 289-8928
Mandated Online Tax Collection Misguided
Lenard Sees Few Large States Imposing Will on Less Populated Ones

WASHINGTON D.C. - Requiring compliance with the Streamlined Sales and Use Tax Agreement (SSUTA) would be harmful to many states, yield little in additional tax revenues, and undermine tax competition among states and jurisdictions, says Progress & Freedom Foundation Senior Fellow Tom Lenard. In "The Streamlined Sales Tax Project: An Initiative Whose Time has Not Yet Come," an essay written with Independent Analysis President Stephen McGonegal in the current Milken Institute Review, Lenard writes that "mandating SSUTA compliance would be tantamount to a requirement to adopt SSUTA."

Lenard, PFF's vice president for research, argues that a relatively large number of states would benefit from not participating in SSUTA, including states with little sales tax. In fact, according to a PFF study, those states would have "potentially a lot to gain" by opting out. "States choosing not to join will enjoy a competitive advantage visàvis SSUTA states." SSUTA proponents recognize that this is a problem for the viability of the SSUTA. Lenard points out that "because the benefits of SSUTA to the participating states decline as additional states opt out, some of its proponents have proposed that states - even if they choose to opt out - should still be required to collect taxes for SSTP members."

Such a mandate, Lenard says, "would seriously erode the benefits of tax competition that are an important part of our federal system." States that currently attract commerce with an absence of sales taxes might be forced to impose them.

SSUTA is a multistate compact designed to harmonize and simplify sales tax collection in order to bypass a 1992 Supreme Court decision and allow collection of taxes from outofstate vendors. As of September 2004, 20 of the 42 states in the Streamlined Sales Tax Project had adopted SSUTA, and others were considering it. Several members of Congress wish to have compliance with SSUTA become mandatory for any vendor with annual receipts of over $5 million if SSUTA is adopted by at least 10 states with 20 percent of the U.S. population.

In a time of tight budgets, efforts by some state officials to collect online sales taxes is understandable, says Lenard, but such taxes won't be the panacea they are believed to be. "In fact," he says, "the bulk of potentially taxable remote sales are not online, but from traditional offline retail categories like direct mail, catalog sales and telemarketing. Overall, out of the $1.15 trillion in remote sales in 2001 (the most recent year for which complete data were available), only $123 billion would have been affected by adoption of SSUTA. The remaining remote sales were either exempt or already taxed."

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.



The Progress & Freedom Foundation