The Streamlined Sales Tax Project Can’t Get No Respect

Rhode Island has a 7% sales tax that convers many, but not all consumer purchases. As in many other states, major categories of spending are left out, such as clothing and groceries. Rhode Island Governor Lincoln Chafee wants to apply a new 1% sales tax to those and many other currently untaxed items. The proposal is meant to raise revenue to help the state close a projected budget shortfall of $300 million for fiscal 2012.

There’s only one problem. Such a tax would violate the agreement Rhode Island signed on to when they joined the Streamlined Sales Tax Project (SSTP). The SSTP is a voluntary agreement designed to bring simplicity and uniformity to state sales taxes. There are currently thousands of sales tax jurisdictions, each potentially with its own rules about what is and is not taxed and at what rates, making it difficult for out-of-state and online retailers to collect the correct sales tax. In return for adopting the SSTP’s simplification and uniformity requirements, member states receive tax revenue from a group of businesses that has voluntarily agreed to collect sales taxes for all the member states.

Simplifying and standardizing state sales taxes would make it easier for online retailers to collect sales taxes on their sales to consumers all over the country. With enough simplification, Congress may eventually authorize states to collect sales tax no matter where a company sells. Unfortunately, the simplification isn’t going as well as some had hoped. As my colleague Joe Henchman wrote recently:

There are still thousands of sales taxes, they are still not aligned to zip codes (although businesses who sign up for the SSTP aren’t held liable if they get it close enough), similar products are still taxed differently within states, and too many states tax business-to-business transactions.

The Rhode Island governor’s proposal for multiple sales tax rates is “generally a no-no” according to Scott Peterson, Executive director of the Streamlined Sales Tax Governing Board, the organization that oversees and enforces the SSTP agreement. The SSTP allows for special rates only for groceries, vehicles, drugs, and fuel, but the Rhode Island proposal goes beyond that to place a special 1% rate on various items such as clothing, newspapers, and boats.

That it would prove difficult to get state policy makers to cooperate on a nation-wide plan to simplify tax laws is not surprising. The Tax Foundation supports tax simplification and broad sales tax bases, coupled with low rates, but it can be difficult to get states on board. Chaffee thinks the state will get nearly $90 million annually from the 1% sales tax proposal, which far outweighs the roughly $2 million the state receives in voluntary sales tax collections as a results of being an SSTP member.

A Tax Analysts report (subscription required) sums up the attitude of the Ocean State’s governor regarding tax simplification and his state’s SSTP membership:

As for the potential impact of his proposal on the state’s membership in the streamlined agreement, Chafee said on February 19: “I was aware when I proposed it.”

Chafee said he spoke with a governing board official before he formally proposed the tax during his campaign last year, and he concluded that “states come and go” from the agreement.