There is a movement to change the way sales tax is collected. A number of states have signed a compact to participate in what is known as the “Streamlined Sales Tax Project,” Washington included. The stated goal of the project is to simplify and make uniform sales tax laws, but to the uninitiated, it must be said, even the new system seems incredibly convoluted.

Why capturing sales tax is difficult

Forty-six states impose sales taxes. Collecting sales tax across state lines is tricky, however, because the nation has 7,500 state and local taxing jurisdictions with rules and rates of their own.

The complexity of the overall system is one reason the United States Supreme Court determined in 1992 that states could not require mail-order (and Internet) firms to collect sales tax unless they have a physical presence in the state.

“This gives catalog and Internet-based businesses a huge advantage over brick-and-mortar businesses,” said State Rep. Larry Springer (D-Kirkland).

In 2006, Washington got about 47 percent of its tax revenue from sales taxes. A Washington Research Council policy paper entitled “Streamlined Sales Tax Once Again Before the Legislature,” stated as more and more people turn to mail order and the Internet firms to shop, the state’s sales tax base erodes. Last year alone, the state’s Department of Revenue put tax revenue lost to untaxed online purchases at $626 million.

So in 2000, a collective effort began to simplify and modernize the collection of sales tax. The Research Council policy paper said the states hope that once sales tax laws are made similar, either Congress or the Supreme Court will require out-of-state vendors to collect sales tax. Needless to say, there is no guarantee this will happen.

“The current administration has said it doesn’t want to tax the Internet,” said Rep. Springer. “So states got together and said what do we need to do nationally to solve this problem?”

In 2002, the Washington Legislature bought into the multi-state effort. In fact, 35 of the 46 states that impose a sales tax joined the Streamlined Sales Tax Project to some degree or other. Washington authorized its Department of Revenue to participate in developing a simplified, more uniform sales tax structure. In 2003, the Legislature enacted a law to implement the changes. The legislation, however, stopped short of conforming to all of the provisions of the multi-state compact.

Who gets the sales tax?

One of the things the Legislature did not adopt in 2003 was a provision that would change the state’s sales tax sourcing rules. A bill before the state House of Representatives, if passed, would change them. The bill already passed in the Senate.

Right now, the state’s sales tax is origin based: Sales tax revenue is credited to the place where a purchase takes place. For example, sales tax revenue from a bouquet of flowers purchased at Molbak’s goes to the state and the City of Woodinville.

New rules would have the sales tax credited to where the purchaser takes final delivery. So if the purchaser took possession of the flowers at Molbak’s, the state and Woodinville would get the tax. However, if the bouquet were delivered to a relative in Florida, the sales tax would go to Florida.

Another example: Say a person bought a table and couch at Bothell Furniture. They put the table in their SUV and drive it home. The purchaser took possession of the table in Bothell. The sales tax would go to the state and Bothell. If they asked to have the couch delivered to their home in Woodinville, the sales tax would go to the state and Woodinville. In other words, the new system would have the sales tax go to the point of delivery, not to the point of sale.

Of course, there are exceptions: Sales tax from the purchase of cars, aircraft, watercraft and manufactured / mobile homes would go to the place from which the delivery was made.

Pros and cons

State Sen. Eric Oemig (D-Kirkland) said the virtue of the tax bill is in the details.

“If it makes it easier and more uniform for businesses to collect sales tax,” said Oemig, “it makes economic sense.”

Oemig heard from some small business owners who said at the retail level, it costs them between 13 and 15 percent of their profits to collect sales tax for the state.

“Hopefully, these transaction costs go down,” he said.

In fact, lowering the cost of doing business is one of the merits of the bill, according to Oemig. Another advantage he cites is generation of more sales tax revenue for the state when people buy from out of state. Yet another benefit is more tax revenue for municipalities with no good retail presence, he said.

One has to wonder if there are unintended consequences to the legislation.

Winners and losers

Cities such as Brier, Clyde Hill, Medina, Mountlake Terrace, Sammamish, for example, have a disproportionate number of residents to businesses – lots of residents, few stores.

For a population with a small sales base, a point of delivery sales tax becomes a revenue source. Though residents of, say, Medina, may not spend a lot of money within their own town, residents, nonetheless, spend money. If sales taxes were attributed to the point of delivery, Medina, rather than the point of sale, Bellevue or Seattle, for example, Medina stands to gain.

Woodinville

But the City of Woodinville would be one of the net losers if the new sourcing rule were adopted. Woodinville has a very strong sales tax base, the seventh best per capita sales tax rate in the state. According to Finance Director Jim Katica, last year, the city had nearly $750,000,000 in total taxable sales. These sales brought about $6.5 million in sales tax revenue to the city. As it is, the city has a handful of businesses that provide lots of sales tax revenue.Many of these businesses, however, ship a large portion of their products out of the city. If the new sourcing rule were in place, the cities that received the products would get the sales tax, not Woodinville.

Katica estimates $1.2 million of the current sales tax revenue would shift to other jurisdictions, money that is used for city operations: police, planning and permitting, road maintenance, parks and recreation, for example. With less sales tax revenue, these operations could be impacted.

Mitigation

The good news is the state is planning “mitigation for a certain period of time to soften the blow to negatively impacted cities,” said Springer.

“Any revenue lost will be made up by the state,” said Oemig. “So if Woodinville is losing money, the money gets paid back. But you have to remember that all cities stand to pick up revenue from new sources. Over time, as the gap closes, the mitigation would shrink.”

According to the current wording of the bill, on July 1, 2008 (the day the sourcing rule would become effective), the State Treasurer must transfer $31.6 million into the Streamline Sales and Use Tax Mitigation Account from the General Fund “to fully mitigate the jurisdictions that are negatively impacted.” There is nothing in the bill about when the mitigation ends.

If the House does not alter the wording, negatively impacted cities would receive 100 percent mitigation. The City of Woodinville would get back the $1.2 million it expects to go to other jurisdictions. If anything short of 100 percent mitigation is offered, the city might have to adjust to a new financial reality, might have to scrutinize its priorities.

“We’re hoping the bill passes with 100 percent mitigation,” said Katica.

Regardless, he said, the city would survive. It is fiscally sound; it is blessed with a good sales tax base that is forecast to grow.

A matter of perspective

The Research Council stated, “Some will see the extension of sales … tax to currently untaxed remote sales as a tax hike. Others view the extension as simply better enforcement of existing taxes, which would make the system more fair and would level the playing field for in-state retailers facing tax-advantaged out-of-state competitors.”