The Streamlined Sales Tax Project (SSTP), currently being piloted in the United States, may offer a model for Europe. David Ford, Director of Ford-Peacock Consultancy Ltd, a specialist PR and marketing agency focused on the IT and telecoms sectors, explains.
Published in the September 2001 issue of Tax Adviser. KEY POINTS
- Existing rules regarding VAT on e-commerce transactions creates anti-competitive discrepancies, in particular with regard to digital sales.
- The SSTP in the United States demonstrates that the automatic calculation, reporting and remittance of consumption taxes by trusted third parties may be used to alleviate inequalities in the tax system and reduce the potential loss of tax revenue.
- The potential application of these principles within the EU or OECD remains untested but may be part of the future pattern of global tax agreements, in particular with respect to the taxation of digitised goods and services.
- The prospect of relief from the VAT/GST compliance burden – and its associated penalties for inaccuracies in collection and remittance – may prove pivotal in persuading merchants to participate in a European equivalent to the STTP.
- The development of a global technology-based solution to the settlement of consumption taxes should not be confused with the need to seek global agreement on the levying of VAT on e-commerce transactions nor with the need for companies to make certain that their systems are capable of ensuring VAT or GST (goods and services tax) compliance wherever they trade.
- It is likely that moves towards global agreement on VAT and e-commerce transactions will require companies to adapt their systems to take into account all the local VAT permutations that might apply.
There is a surprising degree of similarity between the United States’ sales/use tax and EU VAT systems. Both place a significant burden on business to levy, collect, remit and report taxes to the appropriate tax authority. Both hold out the prospect of penalty and interest charges for companies that fail in their obligations. Both began as simple, straightforward consumption-based taxes that have since grown into complex leviathans.
But in one significant respect the two systems are very different. Following the ‘physical presence’ Supreme Court ruling in the 1960s, US companies are not required to collect sales or use taxes from customers unless those companies have substantial physical ties to the taxing jurisdiction in which their customers reside. Instead, the onus shifts to the consumer who is legally required to remit the appropriate tax directly to their tax authority. Not surprisingly few do and the result is a significant loss of tax revenue that is perceived to be escalating rapidly with the expansion of e-commerce.
The level of tax lost in this way is uncertain but it is clear that it will continue to increase with the growth of e-commerce. In order to protect this revenue source the tax authorities need to simplify the tax collection process in order to win and maintain public and business confidence.
In mid-2000, the US Multistate Tax Commission and the Federation of Tax Administrators created the Streamlined Sales Tax Project (SSTP) to author proposed transaction tax simplification legislation.
The Streamlined Sales Tax Project is a multi-state project with a mission to develop a simplified sales tax collection system for all types of commerce, including both Internet and non-Internet (traditional) transactions. The project is composed of representatives from 38 states and several groups representing localities. The SSTP also receives input from representatives of industries in the private sector that are impacted by sales tax laws.
An important part of the project is to test the use of a certified service provider – also known as a trusted third party (TTP) – to perform the sales tax administration functions of a retailer. It is expected that the use of third-party technology will greatly reduce the tax compliance burden for merchants.
Three companies were awarded contracts to act as trusted third parties in a pilot program: TAXWARE International, Inc. (who were awarded two contracts), Pitney Bowes, Inc. and esalestax.com (who were awarded one each). Four US states are participating in the pilot – North Carolina, Kansas, Michigan and Wisconsin. The pilot program began last October and went ‘live’ in terms of processing transactions in early August. Due to complete by the end of September, participating states have the option of two six-month extensions.
Participating retailers include both traditional and e-commerce based merchants. In the pilot program, participating retailers are relieved from the responsibility to calculate, report and remit transaction tax liabilities, and will not be subject to audit for any transactions processed by the pilot system unless fraud is suspected. The relevant TTP will assume all the transaction tax compliance obligations of the retailers.
The technology developed by Taxware for the SSTP is designed to eliminate the need for retail merchants to register with individual states, research tax rates and laws, file regular returns and defend audits.
The pilot system operates as follows:
- The trusted third party (TTP) maintains electronic tax databases of state tax policies.
- At the point of transaction, the retailer’s system automatically polls the TTP’s system that calculates the precise tax to be levied on the sale before the customer is presented with the final bill.
- Upon verification of the payment, the appropriate tax is remitted direct to the TTP who forwards it to the appropriate state.
The STTP is intended to relieve merchants of the burden of calculating and remitting sales and use tax to the states, with the goal of encouraging more retailers to volunteer to collect taxes than do so today. The technology associated with the project allows calculation and remittance of these taxes to be done on the merchant’s behalf remotely, through a process sanctioned by participating states, thus reducing the cost associated with compliance. The pilot program is expected to handle thousands of live transactions each month; small volumes relative to the total retail trade perhaps, but very substantial for such as radical program as the SSTP.
The adoption of such technology in the EU could significantly reduce the VAT burden on business. It would also represent an extension of the Inland Revenue’s responsibilities although these in turn would be ‘privatised’ as the independent trusted third parties would be acting on the Revenue’s behalf. Most interestingly though, such a system could help provide a solution to the problem of taxing digitised sales; goods and services sold and delivered using the Internet.
Taxing digitised sales
The taxation of digital products compared with physical goods and services is currently full of anomalies and therefore subject to much debate within the EU and OECD.
- Digital sales to individuals within the EU by companies based in the EU attract VAT at the supplier’s rate. This can be an advantage over the sale of equivalent physical goods where the supplier’s VAT rate is lower than that of the customer’s (e.g. where the supplier is based in Luxembourg that has the lowest VAT rate in Europe).
- In other instances though, a digitised product can attract VAT whereas the equivalent physical product would not (e.g. books in the UK).
- Digital sales to individuals within the EU by companies based outside the EU do not currently attract VAT giving non-EU companies a competitive advantage over EU suppliers.
- Digital sales to individuals outside the EU by companies based within the EU may attract VAT at the supplier’s local rate. An example is the sale of a digital novel by a UK vendor to a non-EU purchaser. This places some EU-based companies at a competitive disadvantage.
Both the EU and OECD would like VAT to be levied where digitised products and services are consumed. This would require:
- EU suppliers to charge VAT at the consumer’s domestic rate; and
- non-EU suppliers to register and account for EU VAT supplies to EU individuals.
It remains unclear whether non-EU suppliers would need to register in one or all of the EU member states they supply; and if in one state, whether VAT income from digitised sales would be re-distributed throughout the EU to offset the effect of multiple standard VAT rates.
The current debate is at stalemate following the UK’s rejection of a Swedish proposal to establish a single place of registration for non-EU suppliers, calling instead for a moratorium on Internet taxation in which all digitised products would be zero-rated and therefore tax neutral.
This may provide further impetus to a search for a global solution. This will become more urgent as the volume and value of digitised transactions increase. Technology is creating new levels of complexity in terms of the nature of digitised ‘goods’. For example, the advent of third generation mobile communication will make downloads more commonplace and may lead to a change in the nature of what is downloaded. Another example is ‘subscription’ based sales of tangible goods whose shelf life can be extended via digital downloads (e.g. a music CD which entitles you to listen to music for a limited amount of time after which you can go on-line to ‘subscribe’ to future usability).
SSTP in Europe
Could the principles of the SSTP be applied in Europe, in particular to help resolve the problem of the taxation of digitised goods?
In the US, the predicted loss of tax revenue proved a pivotal argument in winning the support of states for the SSTP. In the EU, such potential tax losses through the non-levying of VAT on Internet and digitised sales remain unsubstantiated.
Early indications are that the technology behind the SSTP pilot program is proving robust and reliable. Technically, a solution seems possible. But as with the US, agreement between states is essential and to be fully effective with regard to digitised sales this needs to be between OECD members and not solely within the EU. Whilst the SSTP may remove a common obstacle to global agreement – a lack of appropriate technology and standards – securing the political will to achieve agreement may be more difficult.
The potential application of the principle of the SSTP outside the US is not lost on Erik R Olbeter, editor of the Internet/Ecommerce Bulletin of the Schwab Washington Research Group*:
‘Companies in this space [Ecommerce Tax Transaction Processing] may have significant opportunity to provide services for international sales tax collection … Foreign country VATs apply to both B2C and B2B sales, meaning that all B2B transactions require tax processing. This difference in the tax code could make foreign markets much more potentially lucrative … WRG believes that the future of tax transaction processing lies in the Internet, and companies with a lead in ecommerce sales transaction processing will likely be well positioned to serve as broad transaction processors for online and brick and mortar merchants.’
Meanwhile the development of an international technology-based solution to the settlement of consumption taxes should not be confused with the need for companies to make certain that their systems are capable of ensuring VAT or GST (goods and services tax) compliance wherever they trade. As companies increase their level of cross-border trade, their exposure to multiple tax regimes increases. Systems such as Taxware’s Worldtax software integrated with a company’s financials can assist by automatically calculating the correct tax according to location, product/service and tax registration data.
TAXWARE International Inc. (www.taxware.com)
Streamlined Sales Tax Project (www.streamlinedsalestax.org)
* Schwarb Washington Research Group estimate the global market for e-commerce tax solutions to be valued at $600m in 2004.
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September 2001 by