NCSL Executive Committee Task Force on State and Local Taxation

Los Angeles, California

July 29, 2018

Karl Frieden, V.P. & General Counsel, COST

Fred Nicely, Senior Tax Counsel, COST

COST Scorecard on the States’ Sales Tax Systems

Impact of South Dakota v. Wayfair

• The Court noted that South Dakota’s law was designed to prevent discrimination against or undue

burdens upon interstate commerce

• Importantly, the Court noted three features about South Dakota’s law that provides a guide for

other states to follow to obtain remote seller collection authority and minimize protracted litigation:

• Transactional Safe Harbor

• No retroactive application; and

• Membership in the Streamlined Sales and Use Tax Agreement (SSUTA)

• This Task Force in June unanimously passed a resolution for the states to consider not starting

remote seller collection as a result of the Wayfair case until 1/1/20192

Impact of South Dakota v. Wayfair

• Specific Items Noted in Wayfair Decision Related to Streamlined Sales Tax:

• Standardizes taxes to reduce administrative and compliance costs

• Addressed in COST’s Sales Tax Systems Scorecard

• Single state level administration

• Addressed in COST’s Sales Tax Systems Scorecard

• Uniform definitions of products and services

• SSUTA membership addressed in COST’s Sales Tax Systems Scorecard

• Simplified tax rate structures

• Addressed in COST’s Sales Tax Systems Scorecard

• Access to “sales tax administration software paid for by the state”

• Vendor Compensation & SSUTA membership addressed in COST’s Sales Tax Systems Scorecard

• Audit protections

• False Claims & Class Action Suits addressed in COST’s Sales Tax Systems Scorecard 3

State Remote Seller Collection Versus Efficient and Fair Sales Tax System

•While the U.S. Supreme Court overturned the longstanding Quill precedent in the Wayfair case, attaining a level of sales tax simplification and uniformity that satisfies a constitutional “commerce clause” requirement should not be confused with constructing an efficient and fair modern-day sales tax system.

4

Background on COST’s Scorecards• Purpose of Scorecards is to grade the state tax systems on an objective basis and to work with the states’ policy makers –

both executive and legislative – to improve state and local tax administration for multijurisdictional businesses.

COST’s Scorecards

• State Administrative Scorecard

• Increase in independent tribunals & appeal period from 30 to 60 days

• Unclaimed Property Scorecard

• Increase in states exempting gift cards and b2b transactions

• Property Tax Administration Scorecard

• International and improvement of some states appeal processes

• Sales Tax Systems Scorecard

• The Best & Worst of State Sales Tax Systems: COST Scorecard on Sales Tax Simplification, Uniformity and the Exemption of Business Inputs

• First Edition released April, 2018

5All Scorecards are Publicly Accessible on COST’s Website: WWW.COST.ORG

States’ Sales Tax Systems Scorecard Categories • Scorecard Categories

• Exemption for Business-to-Business Transactions • Fair Sales Tax Administration• Centralized Sales Tax Administration• Simplification & Transparency• Reasonable Tax Payment Administration• Fair Audit/Refund Procedures• Other Issues Impacting Fair Tax Administration

• Non-SSUTA Categories• While the Scorecard incorporates many SSUTA elements, the non-SSUTA items cover

about two-thirds of the categories in the Scorecard.

• What the Scorecard Does Not Grade• Tax Rate Differences • Tax Base Breadth (other than Taxing Business Inputs)

6

Why Modernizing the State Sales Tax Is Critical to State Tax Policy

• General sales taxes account for over 32 percent of all state taxes – and along with personal income taxes – are the largest sources of state tax revenues.

• The U.S. state and local sales tax system is one of the most complex and inefficient consumption tax systems in the world. • Exemption of Business Inputs: Unlike the U.S. states where sales tax on business inputs account for

42 percent of all sales taxes collected , virtually all other countries mitigate pyramiding of their consumption tax by providing more expansive credits for business inputs.

• Uniformity and Simplification: There is a much higher level of consumption tax uniformity in Europe (harmonization through the EU) than in the United States where the largest states with about two-thirds of the U.S. population have not adopted SSUTA.

• Central Administration: The U.S. states’ sales tax system – with 45 state taxing jurisdictions (plus D.C.) and over 10,000 state and local taxing jurisdictions – is the most decentralized consumption tax system in the world.

• The stakes are high: state efforts to significantly broaden the sales tax base to tax the growing services sector continue to founder because of business opposition to the pyramiding of sales tax on business inputs and the overall complexity of sales tax compliance. The sales tax base as a share of personal income is currently only about two-thirds its 1970 level. 7

Overall Scorecard Grades: SSUTA vs. Non-SSUTA States

8

AK

HI

ME

RI

VT

NH

MANY

CT

PANJ

DC

DE

WV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

CO

UT

WY

MT

WA

OR

ID

NV

CAVA

MD

SSUTA Full Member

Average score of SSUTA states: B (12 pts.)Average score of non-SSUTAstates: D+ (19 pts.)

N/A A B C D F

N/A 0-9 10-13 14-17 18-22 22+

Exemption for Business-to-Business Transactions

• COST/EY Study highlighting overall tax on business inputs – 2 points

• Manufacturing exemption – 3 points

• Manufacturing equipment exemption – 2 points

• Manufacturing inputs exemption – 1 point

• Pyramiding tax of service industries – 3 points

• Double tax on equipment to provide service and tax on service when

sold to consumers

9

State and Local Sales Taxes Imposed on Business InputsBusiness Inputs Share of Total Sales Tax Collected

10

47%

32%

37%

32%

46%

39%

37%

33%60%

42%

58%

48%

52%

41%

44%

58%

46%

42%

47%

39%

37% 32%

37%

41%

36% 35%

43%

40%42%

40%

41%

37%

44%

42%

36% DC 42%

MD 42%

NJ 43%

42%

CT 39%

RI 36%

MA 48%

VT 51%

35%

40%

44%

HI 36%

25% - 35% 36% - 45% 46% + State With No Sales Tax

Breadth of States’ Manufacturing Equipment Exemptions

11

32% DCMDNJ

CTRIMAVT

HI

WA

OR

CA

NV

AZ

AK

ID

MT

WY

UT

ND

SD

NE

CO

NM

KS

OK

MN

IA

MO

AR

TX

WI

MI

IL IN

KY

TN

MS

LA

AL GA

FL

SC

NC

VAWV

OH

PA

NY

VTNH

ME

MACT

NJMD

None or Restricted Exemption Direct or Primary Use Exemption Integrated Plant Exemption

State With No Sales Tax

Double Taxation of Select Service Providers: Wired/Wireless, Cable, Electric + Gas

12

32% DCMDNJ

CTRIMAVT

HI

WA

ORID

CA

NV

MT

WY

UT

AZ

CO

ND

SD

NE

KS

NM

TX

AK

MN

WI

MI

IA

MO

OK AR

LA

TN

MS

IL INOH

PA

NY

VT

ME

NH

WVVA

NC

SC

GAAL

FL

MDNJ

MACT

No Double Tax

1 Service Industry Double Taxed 3 Service Industries Double Taxed2 Service Industries Double Taxed

State With No Sales Tax

Fair Sales Tax Administration

• Exemption Certificate Procedure - 2 points

• Good faith on acceptance

• 120-day period on audit to perfect

• Allow MTC or SSUTA certificate

• Verification of exemption/account number

• Vendor Compensation – 2 points

• No vendor comp. or less than $12,000 per year (de minimis) - 2 points

• At least 0.5% for one-rate state or 0.75% for states with local rates – no points

• Broad Direct Pay – 1 point

• Not overly restrictive – no thresholds over $1 million per year13

Good Faith Requirement

14

AK

HI

ME

RI

VT

NH

MANYCT

PANJ

DC

DE

WV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

CO

UT

WY

MT

WA

OR

ID

NV

CAVA

MD

Good Faith Requirement Imposed No Good Faith Requirement State With No Sales Tax

Vendor Compensation

15

AK

HI

ME

RI

VT

NH

MANYCT

PA

NJ

DC

DE

WV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

CO

UT

WY

MT

WA

OR

ID

NV

CAVA

MD

Acceptable Vendor Comp. Limited or Capped Vendor Comp. No Vendor Comp.

State With No Sales Tax

Centralized Sales Tax Administration

• Population of state as compared to number of local jurisdictions - 1 point

• Less than 20,000 – 1 point

• Central administration – 3 points

• Uniform tax base

• Centralized filing and auditing

• Centralized appeals

• Website has current & historical tax rates and boundaries – 1 point

16

Number of Taxing Jurisdictions

17

1 Taxing Jurisdiction 2-500 Taxing Jurisdictions 500+ Taxing Jurisdictions

50+ Jurisdictions With a Population Ratio of Under 20,000 State With No Sales Tax

AK

32% DC MDNJ

CT RI MA VT

HI

WA

OR

CA

NV

ID

MT

WY

UTCO

AZ NM

ND

SD

NE

KS

OK

TX

MN

IA

MO

AR

LA

WIMI

IL IN

KY

TN

MS AL GA

SC

NC

VAWV

OH

PA

NY

VTNH

ME

CTMA

MDNJ

FL

Simplification & Transparency

• SSUTA State? - 2 points

• Tax on digital products and prewritten software – 2 points

• Is by legislation or administrative rule/policy position?

• Liability relief – 1 point

• Relief should broadly apply to most written correspondence

18

Streamlined Sales Tax States

19

AK

HI

ME

RI

VT

NH

MANY

CT

PA

NJ

MD

DE

VA

WV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MNND

SD

NE

NMAZ

CO

UT

WY

MT

WA

OR

ID

NV

CA

DC

Full Member Associate Member Non-Member StateState With No Sales Tax

Taxation of a Person Merely Accessing Pre-Written Software

20

AK

HI

ME

RI

VT

NH

MANYCT

PA

NJ

DC

DE

WV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

CO

UT

WY

MT

WA

OR

ID

NV

CAVA

MD

No Tax Imposed Tax Imposed Without Statutory Authority Tax Imposed by Statutory Authority

State With No Sales Tax

Reasonable Tax Payment Administration• Advance Payments - 2 points

• One per year or month – 1 point

• Two or more per month – 2 points

• Full credit other states sales/use taxes – 2 points

• Credit sales and use tax – 1 point

• Credit other states’ state and local taxes – 1 point

• Periodic leases tax based on each lease payment – 2 points

• State accelerating or continuing tax on leases when property no longer in the state – 1 point

• Credit for tax paid in other states on such leases- 1 point

• Bad debt deduction applies to third-party private label credit card – 1 point

21

Tax Credit Against Sales and Use Tax

22

AK

HI

ME

RI

VT

NH

MANY

CT

PANJ

MD DE

VA

WV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN ND

SD

NE

NMAZ

CO

UT

WY

MT

WA

OR

ID

NV

CA

DC

Credit Only Against Use Tax Credit Against Both Sales and Use Taxes State With No Sales Tax

Fair Audit/Refund Procedures

• Purchasers ability to obtain refunds directly from the state - 1 point

• False claims act & class action suits – 2 points

• Allow either – 1 point each

• Contingent fee or private auditing – 1 point

• Allow either – 1 point

23

False Claims Act & Class Action Suits

24

AK

HI

ME

RI

VT

NH

MANYCT

PANJ

DC

DE

WV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

CO

UT

WY

MT

WA

OR

ID

NV

CAVA

MD

Allows Both FCA and Class Action Allows Class Action No Sales TaxNo FCA or Class Action

Other Issues Impacting Fair Tax AdministrationStates requiring SSNs or addresses on returns:

DC, HI, IN, ND, and PA

States with other issues:

CO – Local nexus issue for intrastate delivery sales

GA – Direct pay permit holders, by regulation, denied interest

IL – Taxpayers being thrown in local tax distribution dispute

LA – “Clean” one penny tax

MA – Real time collection

OH – Onerous employment services tax25

Questions

Karl Frieden, V.P. & General Counsel, COSTkfrieden@cost.org

202-484-5215

Fred Nicely, Senior Tax Counsel, COSTfnicely@cost.org

202-484-5213