The Streamlined Sales Tax Governing Board (the “Board”) reached a compromise at its December meeting, possibly removing a significant impediment that threatened the future growth of the streamlined sales tax project. On December 12, 2007, the Board unanimously voted to amend the Streamlined Sales and Use Tax Agreement (“SSUTA”) to permit origin based sourcing for intrastate sales of tangible personal property and digital goods. This amendment represents a significant shift in Board policy and marks the second time in as many meetings that the Board has modified the SSUTA in an effort to resolve issues that have plagued the project since its infancy.1
The Board currently includes 22 member states, 17 full member states, and five associate member states. Full member states are Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, West Virginia, and Wyoming. Associate member states are Nevada, Ohio, Tennessee, Utah, and Washington. Nevada and Washington are slated to become full members on April 1, 2008 and July 1, 2008 respectively. Tennessee will become a full member effective July 1, 2009. Origin-based sourcing may open opportunities for other states to join.
General Rule: Sales Sourced to Location Where the Purchaser Receives the Product
A goal of the streamlined sales tax project is to develop and implement simplified sales and use tax laws and ease compliance burdens for multistate businesses. One manifestation of this goal was the implementation of uniform sourcing rules to establish which state and local taxing authorities could tax a particular transaction. Prior to the December amendments, the SSUTA required that member states source both intrastate and interstate retail sales, excluding leases and rentals, of tangible personal property and digital goods to the location where the purchaser receives the product.2 The SSUTA provides the following hierarchy for sourcing sales:
(1) When the product is received at the business location of the seller, the sale is sourced to that business location;
(2) If (1) is inapplicable, the sale is sourced to the location where receipt by the purchaser occurs, including the location indicated by delivery instructions;
(3) If (1) and (2) are inapplicable, the sale is sourced to the address of the purchaser available from the seller’s business records maintained in the ordinary course of the seller’s business;
(4) If (1) through (3) are inapplicable, the sale is sourced to the address of the purchaser obtained during the consummation of the sale, including the address on a payment instrument if no other address is available;
(5) If none of the above apply, the location is determined by the address from which tangible personal property is shipped, from which the digital good or the software delivered electronically was first available for transmission by the seller, or where the service was provided.3
For these purposes, the purchaser is deemed to receive the good when the purchaser (a) takes possession of tangible personal property; (b) makes first use of services; or (c) takes possession or makes first use of digital goods, whichever comes first.4
These destination sourcing rules remain the default sourcing rules for sales of tangible personal property and digital goods under the SSUTA, and will continue to apply to interstate sales after the amendments discussed below become effective.5
Member States May Elect Origin-Based Sourcing for Intrastate Sales of Tangible Personal Property and Digital Goods
Some states have been unwilling or unable to adopt the destination based sourcing mandate of the SSUTA and, thus, have not been able to adopt conforming legislation. Origin based sourcing is a critical issue for states that permit local taxing jurisdictions to tax intrastate sales that originate in their jurisdictions. Taxing sales in this manner not only benefits the local pizza delivery business that is only required to collect tax for one local jurisdiction, but has also benefited cities that are home to large retailers. Texas, California, Virginia, and Missouri, among others, have listed destination sourcing as a hindrance to their participation in the streamlined sales tax project.
In an effort to get Texas and other largepopulation states to join the ranks of existing member states, the Board amended the SSUTA to permit origin-based sourcing for intrastate sales of tangible personal property and digital goods. While destination sourcing remains the rule for interstate sales, the newly adopted sourcing rules will permit member states with local jurisdictions that impose or receive sales or use tax to elect origin-based sourcing for intrastate retail sales of tangible personal property and digital products.6 The origin based sourcing rules do not apply to leases or rentals or to sales of taxable services.7
A member state electing origin-based sourcing may source retail sales of tangible personal property or digital goods to the location where the order is received by the seller if: (1) the order is received by the seller in the same state where the purchaser receives the product (i.e., an intrastate sale); and, (2) at the time the order is received, the record-keeping system of the seller used to calculate the sales or use tax imposed captures the location where the order is received by or on behalf of the seller.8 The location where the order is received is defined to include the physical location of a seller or third party such as an outlet, office location, or automated order receipt system operated by or on behalf of the seller where the order is initially received.9 The location where the order is accepted, completed, or fulfilled, or from where the product is shipped, is not relevant.10 For these purposes, an order is considered received when all of the information necessary to determine if the order can be accepted has been received by or on behalf of the seller.11
Under the current revisions, if mixed sales of both tangible personal property or digital products and taxable services (i) are made pursuant to a single contract or in the same transaction, (ii) are billed on the same statement, and (iii) would be sourced to different jurisdictions, the member state is required to elect either origin or destination sourcing to determine a single situs for the transaction.12 The provision on origin sourcing to mixed sales is expected to be reexamined at the next Board meeting to address concerns from the business community.13
The revised SSUTA contains several restrictions on states electing origin sourcing that are aimed at protecting purchasers. First, a purchaser may not be required to pay additional tax based on where the product is delivered (i.e., a use tax).14 Further, purchasers must be allowed to rely on written representations by the seller as to the location where the seller received the order.15 Absent written notice from the seller, the purchaser may use the location indicated by a business address for the seller that is available in the purchaser’s business records to determine the applicable sales tax rate.16
Interestingly, a member state cannot require a seller to use a record-keeping system that captures the location where an order is received.17 Accordingly, sellers who do not wish to use origin sourcing may be able to use the default destination sourcing by not capturing the location in the record-keeping system “used to calculate the proper amount of sales and use tax to be imposed.”
Five New Member States Must Elect Origin Sourcing to Trigger the Amendments
States that elect the origin sourcing rules and otherwise substantially comply with the SSUTA will be allowed to join the Board as associate members.18 These states will automatically become full members on or after January 1, 2010, but only if five states, which were not full member states on December 31, 2007, are found to be in substantial compliance with the SSUTA and have adopted the origin sourcing rules.19 Provided at least five new member states have adopted the origin sourcing rules, the rules will become fully effective on January 1, 2010.20 States electing origin sourcing after the new rules become fully effective may become full member states immediately.21
Origin Sourcing Viewed by Many as a Positive Step Necessary to Keep the Streamlined Project Moving Forward
The adoption of an origin sourcing option is seen by many as a positive and necessary step to ensure that the streamlined sales tax project continues to move forward.22 Many states, including Ohio, Utah, and Tennessee, have already expressed interest in adopting the new sourcing rules.23 It is believed that this change will also make it easier for states like Texas, Virginia, and Missouri to move closer to joining the Board. Whether the adoption of origin sourcing helps bring new states on board or not remains to be seen; however, it should be viewed as a positive step by the Board to hold together the increasingly fragile coalition it has built over the previous seven years.