Senate Bill 157 Ohio Discussion Document
January, 2005 Phoenix Meeting
Destination sourcing for retail merchants with low shipping sales
This document presents the perspective that implementation of the Multi-state Streamlined Sales Tax Agreement will be expedited if a means is found to address needs of retailers shipping low dollar amounts of goods into or within states with diverse sales tax rates.
Ohio has been a leader among states seeking to improve the sales tax climate through the Streamlined Sales Tax Project (SSTP). In November of 2003, Ohio state officials discovered two difficulties associated with their effort to convert from origin to destination sourcing -- compliance difficulty by some retail merchants and local government revenue shifts. These issues are in various stages of manifesting themselves in a number of states, suggesting that addressing them proactively will allow the project to more quickly achieve critical mass and expand its reach with more conforming states. Ohio has just enacted what it believes to be a substantial fix to avoid local government revenue shifts. SB 218 seeks to stabilize local government funds by capturing much of the unanticipated windfall funds from jurisdictions gaining from destination sourcing and redistributing them to local governments with losses. This solution comes at some expense, as it requires additional reporting from retail merchants and adds administrative burden to the Department of Taxation.
The unresolved problem
The remainder of this document focuses on the unresolved compliance difficulty for many retail merchants as origin sourcing is replaced with destination sourcing. It was discovered that small to medium sized retail merchants typically do not yet have access to systems the project envisions to ease their compliance with conversion to destination sourcing for shipped goods and services. Technical upgrades and new solutions are expected to begin appearing during 2005. But it will take time for these products to penetrate the market place, especially in smaller and less sophisticated businesses. This SSTP project envisions these technical solutions as foundational to fostering a business-friendly sales tax environment. Pushing a large number of businesses across the transition line before these technical solutions are in view poses a threat to successful deployment of this project.
Several benefits will accrue from allowing states facing destination issues the flexibility to pace the transition to destination sourcing in ways that work from larger retail enterprises down to the smaller businesses. This will reduce political resistance to the change, establish a better pathway for technical solutions to develop down to the smaller enterprise level and improve transition experiences for the business community.
Furthermore, the Agreement does not mandate that retail merchants adopt one of the three technology models. Consequently states also need flexibility to address retail community needs even after mature vertical applications become widely available at affordable prices. However, only the shorter-term aspects are addressed in this document.
Until now, Ohio has dealt with this destination sourcing difficulty by delaying implementation three times. However, beginning January 1, 2005, retail merchants now have the voluntary option of electing to use destination sourcing under Ohio law. Some are expected to make this election, especially businesses already having nexus in multiple states and already employing capable technical systems.
At the moment, Ohio is scheduled to mandate destination sourcing for all Ohio merchants on July 1, 2005. It was decided to continue seeking ways to resolve this issue at the multi-state project level rather than enacting a solution for Ohio that carried a high risk of delaying or even preventing Ohio from achieving certification as a conforming state.
Ohio officials, including Governor Taft and appointed representatives to the Implementing States from the Ohio House and Ohio Senate, are in agreement that Ohio wants to find a track to accommodate the needs of its business community that also makes it possible to achieve certification as a conforming state.
We have suggested a couple of approaches in our discussions in the 14-state committee that was appointed in October. Based on that discussion it seems that the most acceptable solution would involve building on the voluntary conversion status by giving states the option of phasing in their conversion from origin to destination sourcing in steps based on the size of taxable sales delivered under destination sourcing over a period of years. This will have the advantage of keeping pressure on for application development, while giving these applications time to work their way down to the smaller retail businesses.
A proposed amendment to the Agreement has been prepared in order to further discussion with interested parties.
We believe it is better for states in this project to address this issue up front in the agreement than to put states in the difficult position of picking less desirable administrative or political options like relaxed enforcement, delayed participation in certification or unilateral solutions undertaken with the hope that they might be deemed in substantial compliance.
It is the assessment of the two Ohio legislative representatives that they have strong support in both houses to enact modification of the July 1, 2005, bright line conversion to destination sourcing along the lines of legislative language considered in December and being re-introduced in January in the new session. These provisions were not enacted in SB 218 primarily because legislators want to negotiate a solution amongst the states that might also benefit other states and keep Ohio in conformity with the Agreement.
That Section 330 be added the Streamlined Sales and Use Tax Agreement to read as follows:
Section 330: Transition Period
(A) To address both technological issues and concerns with small businesses being able to comply with Section 310, notwithstanding that Section, a state may by law, rule or administrative practice relieve sellers from the destination sourcing requirements, for tangible personal property and/or services, that apply to taxes collected for localities, but not the state tax rate. States may provide such relief only to sellers that in immediate preceding calendar year had taxable sales that were not subject to sourcing under Section 310, subsection (A)(1), excluding any taxable sales sourced to the same taxing jurisdiction of the place of sale, that did not exceed the following:
(1) For calendar year 2005 and 2006, $2,000,000.
(2) For calendar year 2007, $1,000,000.
(3) For calendar year 2008, $500,000.
(4) In any calendar year a seller exceeds the threshold in subsections (A)(1) to (3); such seller shall no longer be eligible to use this Section.
(B) A state must apply these provisions to both in-state and out-of-state sellers, but a state may require a seller making sales from a location in that state to collect any taxes imposed under state law in the locality where the seller is located if the sale was made at that seller's location in the state.
(C)(1) "Seller" as used in this section includes for purposes of ascertaining taxable sales any affiliated entities. An "affiliated entity" is an entity that directly or indirectly is related with one or more entities related in such a way that one entity owns or controls the business operation of another member of the group. In the case of corporations with stock, one corporation owns or controls another if it owns more than fifty per cent of the other corporation's common stock with voting rights.
(2) "Taxable sales" as used in this section includes all sales on which sales or use tax would be due to a state, whether or not the seller has nexus to be required to remit the tax to the state.
(D)(1) A successor to a business that does not have twelve months of sales in the prior calendar year is subject to this Section based on the prior owner's taxable sales.
(2) A new business not subject to subsection (D)(1) may use this section based on the seller's total taxable sales in the prior calendar year, if any.
(E) This Section does not apply to any seller using a service provider or automated system certified under Section 501 or to sales sourced under Section 310 to another state.
(F) Irrespective of the time limitations in subsection (A), a state with a membership effective as determined by Section 804 prior to January 1, 2011 may use this Section by replacing "calendar 2005 and 2006" with "the first calendar year the membership is effective" in subsection (A)(1); replacing "calendar year 2007" with "the second calendar year after the membership is effective" in subsection (A)(2); and replacing "calendar year 2008" with "the third calendar year after the membership is effective" in subsection (A)(3).