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The eTax Collector Cometh

As states streamline their sales tax codes, they are moving ahead with the technology to make it easy for online businesses to collect the tax.

State and local governments have been trying for decades to collect the sales tax owed on out-of-state mail order catalog sales and more recently, online purchases. Thanks to a technology linchpin, the "checks" could soon be in the e-mail.

The software needed to collect taxes on non-brick-and-mortar sales has been around for a long time. But it was difficult for businesses to stay up-to-date on varying state and local tax rates. That increased their chances for error during collection and left them subject to audit.

The Streamlined Sales Tax Project--a state effort put together in 2000 that partners with local governments and the private sector--has worked on simplifying tax codes and is making strides in putting the technology piece in place.

The way the sales tax project envisions it, "certified service providers" it contracts with will go out to individual businesses and provide the software and assistance in setting it up so that even a small business with no tax department could collect taxes.

The project will pay for the cost of the collection software. The states will provide the businesses with their simplified state tax database. Any company contracted as a tax collector will incorporate those state rates into its system. Then, if there are rate errors in the collection process, the businesses will not be held responsible. "If they incorporate our information and we goofed, it's our fault, and we will not hold them liable," says Scott Peterson, director of South Dakota's sales tax division and co-chair of the sales tax project.

In addition, if businesses agree to sign up with a certified provider to collect taxes owed states, they will get tax amnesty for one year with "no look back" on earlier taxes they might now owe. Relief from that burden could be significant if Congress ends up blessing the streamlined sales tax agreement and compels all businesses--online or otherwise--to collect taxes due.

Late last year, the sales project issued an RFP for certified service providers and now is evaluating 12 proposals from companies offering systems to collect and report taxes for businesses. The systems need to identify items purchased and shipping locations, determine whether items are taxable or not and what the tax rate is, accumulate data monthly and compile it into a tax return for the states.

The 42 states participating in the project have their own job to do. They have to simplify and modernize their sales taxes in accordance with the SSTP guidelines, and many states need legislation to do so. Between 15 and 19 states are expected to be ready by October, when the collection system is slated to start up.

Simplifying the tax structure for input into the database is easier for some states than for others. New Jersey, for instance, has no local sales tax. All it has to do is provide correct ZIP codes. Texas, on the other hand, has more than 1,300 local sales tax jurisdictions and many districts that overlap. The challenge is to figure out a tax data system based on addresses when one address may be located within several taxing districts.

Some states have finished modernizing their systems and are ready to roll. South Dakota, which had multiple local sales tax rates, worked on streamlining for two years. Now, of the 200 localities with a sales tax, 132 changed tax rates so local tax rates could be uniform throughout the state. The state developed a GIS system and created maps of municipalities with sales taxes. Those maps were shipped to the local governments for approval of legal boundaries. Streets and addresses were added. Now, businesses can type in an address in South Dakota and receive a tax rate and tax identification number. Once chosen, a certified service provider will incorporate the state database into its system.

Some states can practically taste the new revenues. Washington State estimates that if the system is in place in October, it could see $25 million in additional state taxes in the first year. Tennessee could pull in $24.4 million in state taxes and $8 million in local taxes. For Wisconsin, the ultimate prize could be $150 million a year--the amount it currently loses in uncollected sales taxes.

Streamlining activity is moving along--there is an RFP for a registration system that allows businesses to sign up in one place for 50-state tax collection. "We've still got a long ways to go," says Diane Hardt, co-chair of the project. "It's evolving."

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