Washington Report 012004
The Streamlined Sales Tax Project was created by state governments to simplify and modernize sales and use tax collection and administration. The project's proposals focus on improving tax administration systems for both Main Street and remote sellers dealing with all types of commerce. As of August 2003, 20 states had enacted legislation to bring their laws into conformity with the Streamlined Sales and Use Tax Agreement.
Forty states and the District of Columbia initiated the project in March 2000 largely as a response to the states' inability to collect sales taxes from remote sellers, including companies selling through mail order catalogues and Web sites. The limitation was imposed by the U.S. Supreme Court's decision in Quill Corporation v. North Dakota By and Through Heitkamp, 504 U.S. 298 (1992).
The project's critical issues are simplification, uniformity and the development of rules that apply sales tax based on where the merchandise is delivered. Only by resolving these issues can the states participating in the project petition Congress to grant states the authority to compel remote sellers to collect sales tax on transactions that today are untaxed.
As a representative of the ICFA Government and Legal Affairs Tax Subcommittee, I attended the most recent project meeting in mid-November in Phoenix, Arizona, to watch the proverbial sausage being made. At previous meetings the application of these rules in specific situations, including sales by funeral homes, have been discussed. Specific funeral and burial examples have focused on taxing sales of funeral merchandise and services at the point of ultimate destination or delivery.
Do You Know Where Your Caskets Are Ending Up?
Applying these new general destination-based "sourcing rules" to our businesses presents several problems. First, the project recognizes, probably correctly, that we are not retailers in the traditional sense (i.e., selling merchandise over-the-counter). That said, the project has had difficulty fitting us into traditional personal services categories (e.g., barbers) because of the detailed itemization of our sales contracts and the potential for multiple points of delivery.
If this minutia hasn't put you to sleep, you may be wondering what all the fuss is about. Focusing on the most granular level of detail in our contracts, the project proposes to apply individual rules to each component part.
This means that a city, county or state your business is not located in may tax your sales of caskets, vaults, markers, flowers, etc. Stop and think about that for a moment. If you ultimately "deliver" a vault or marker to a cemetery in another state (directly or via a third-party contractor), you would need to understand the tax rules in that state and collect tax on behalf of that jurisdiction(s).
At this point, you may be wondering what, exactly, the project is going to streamline. But wait, it gets worse. Even if your sales are not destined to cross state lines, you will be required to track sales by destination, using Zip+4 no less, to properly report sales and tax to the state (so that the state can distribute the tax among cities, counties, etc.).
Funeral and burial contracts may result in tax collections for multiple jurisdictions if you sell a casket or urn that is delivered to another service provider, mail miscellaneous merchandise to your customers, etc. Tracking your sales for sales tax purposes will entail a significant change in your business processes, regardless of whether you currently use a computerized or a manual process.
This burden would be more onerous if you do business in one of several states that tax services (e.g., South Dakota, North Carolina, New Mexico, Hawaii, etc.). The project's proposals for services are in the preliminary stages of development and there is no current consensus on this issue.
One proposal would source funeral services to the location where the first service is provided, which the project views as the location of the first call. A second proposal, similar to how merchandise is treated, would require the delivery point of each service (visitation, grave side, chapel, etc.) to be identified, including the possible allocation of transportation charges among applicable taxing jurisdictions. Tracking these delivery points would also entail identification of each contract component based on Zip+4 location.
Elimination of Tax Caps and Thresholds
As if this isn't enough, the Streamlined Sales and Use Tax Agreement [Streamlined Sales and Use Tax Agreement, Article III, §308(a)(3)] currently requires that by December 31, 2005, participating states phase out the use of tax caps and thresholds (i.e., Connecticut's $2,500 exemption for personal property used in burial or cremation [§12-412(55), General Statutes of Connecticut] and North Carolina's $1,500 funeral exemption [§105-164.13(18), General Statutes of North Carolina]).
States can conform to the agreement either by applying the exemption to 100 percent of the sales price or to all sales of specific merchandise. If we do not begin to address these issues now, these exemptions most likely will be eliminated on or before December 31, 2005, to the detriment of our customers.
Clearly, the project's overall goals-uniformity of state and local tax rules, state-level administration of sales taxes; simplified tax returns and simplification of state and local tax rates-are laudable and would benefit us in the long run.
While ICFA has notified the project of our concerns, we have also expressed our interest in teaming with the project to explore the development of a special rule for our industry that will be less burdensome to administer while still fitting within the overall framework of uniformity that the project seeks.
An executive summary of the project can be downloaded atwww.streamlinedsalestax.org/execsum0803.pdf. The Streamlined Sales Tax Project is a work in progress and further developments will be reported to ICFA members. For more information, contact Robert Fells, ICFA general counsel, at firstname.lastname@example.org or 1-800-645-7700.