Just Say "No" To The Taxability Matrix And The Privatization Of Sales Tax Collection (Why I Oppose The Streamlined Sales Tax Scheme)

Several states have banned together to lobby the federal government to push national legislation demanding out-of-state businesses collect sales tax. According to a Supreme Court decision (Quill Corp. v. North Dakota) out-of-state sellers aren't currently required to collect state sales tax. The Court felt collecting and remitting sales tax for thousands of tax jurisdictions was an unreasonable burden on interstate commerce.

State taxpayer dollars funneled through a private non-profit corporation named the "Streamlined Sales Tax Governing Board, Inc." (SSTGB) pays for this lobbying. This corporation is registered in Tennessee. Currently, Democratic Senator Dick Durbin and Republican Senator Mike Enzi are pushing for this so-called "streamlined sales tax" legislation under the name "The Main Street Fairness Act." Their legislation would give the private SSTGB authority over online sales tax collection.

The SSTGB was formed by the National Governor’s Association. Member states pay fees to the organization, provide a database of their tax jurisdictions, and create a "taxability matrix," which categorizes taxable products and non-taxable products and tells us if the state has "sales tax holidays."

Each state creates its own "taxability matrix" which can change. There are over 13,000 unique local tax jurisdictions included in this "simplified" legislation. There apparently isn't even one database of tax jurisdictions, but one database for each state, and each database varies in ease of use. Minnesota has a sweet zip code sales tax calculator. Some states provide an abstruse Excel spreadsheet.

Assume a Minnesota seller makes a sale to a resident in Tennessee. To comply with this proposed legislation, an online seller would first need to look at the customer's state's taxability matrix. All member states must live within their Matrix. I'm not sure if Tennessee took the blue pill or the red pill. But, looking at the matrix, I think that pill was taxable. "Free Samples of Drugs For Human Use" is listed as taxable in Tennessee. Unless, the pill was prescription. In that case, it isn't taxable.

Looking for the product "book," we find no entry in the matrix. To know for sure if books are taxable in Tennessee, we'd need to look at Tennessee's law, it seems. If the book might also be classified as a "school supply," which is listed in the matrix, we'd need to look up a sales tax holiday in Tennessee during which school supplies are exempt from the collection of sales taxes.

We aren't told when the tax holiday applies, but the matrix tells us we can find more information at T.C.A. 67-6-393(a)(2), which is apparently Tennessee legislative code. Googling the legislative code, we see the three-day tax holiday starts at 12:01 a.m. on first Friday of each August. It's a back-to-school tax holiday.

Let's just assume the book is taxable and that the sale doesn't occur during the tax holiday, when the online seller isn't supposed to collect sales tax. Now, suppose the customer gave us a five-digit zip code. That's not sufficient to determine exactly what municipality, city, and/or county taxes apply. But, we can use the customer's address and five-digit zip to determine their nine-digit zip code. The good old postal service provides this. From that we need to find Tennessee's database and determine the actual sales tax rate that encompasses the state rate and all local rates that apply. This is all for the sale of one book.

This convoluted "simplification" could only be envisioned by the collective minds of multiple politicians, legislators, and bureaucrats. Some people say this isn't a problem for small businesses, because there are free companies that will provide small businesses with these calculations. Who pays these companies? Taxpayers.

The SSTGB contracts with private companies allowing them to collect online sales taxes on a for-profit basis. The press release of one aspiring for-profit sales tax collector says that it keeps up to 8% of the sales tax collected. As a taxpayer, it seems impossible to know the details of how much these private companies are paid by the SSTGB or the states. The details of the contracts between the SSTGB and these for-profit companies is opaque. The selection process of just who gets to collect sales taxes for profit is also opaque. This lack of transparency is more than adequate reason that small business owners and citizens should demand their states put an end to supporting this "Streamlined Sales Tax Project."

The whole question of outsourcing sales tax collection to private companies anointed by some private group seems to be something that has flown under the radar. Once we create a private tax collection infrastructure, we're creating a Frankenstein that has a vested political interest in keeping sales taxes complex. These companies go out of business if there is true simplification.

Even though it is unconstitutional today for states to demand out-of-state companies collect sales tax, this new for-profit sales tax collection infrastructure is currently being created with the support of the SSTGB.

Today, sales tax "simplification" is a euphemism used by the Big Box retailers and the states to really mean, "Make online sellers collect sales tax, no matter how convoluted the system is and regardless of how burdensome it will be to the online sellers."

Further, the history of for-profit tax collection isn't pretty. Privatized tax collection is considered by some as one factor which led to the fall of the Roman Empire. Unable to effectively collect taxes, Rome turned to private tax collectors, called publicani. The publicani could pay the taxes owed by other Roman citizens and then had the right to collect the taxes plus their fees. This was called "tax farming." Investing in tax collection was profitable for Rome's elite.

As Roman governors spent more and more money for their own glorification, and their provinces went deeply into debt, they conspired with private tax collectors to make more demands of their citizens. Because the governors had a vested interest in maximizing tax collection, they looked the other way when the publicani used private gangs and violence to extort payments from citizens. The ultimate collusion occurred when the government provided Roman soldiers to the private publicani.

The citizens couldn't feed the greed of the governors and the private tax collectors and the seeds of social unrest were sown. The Empire went kaput.

In The Perils of Privatization: How the Characteristics of Principals Affected Tax Farming in the Roman Republic and Empire, the authors wrote: "The perils of privatization in the late Republic were mainly caused by characteristics of the principals, especially the fact that the Roman senate was a multiple principal with a "revolving-door" relationship with the agents it was supposed to control, and were exacerbated by direct senatorial investment in tax farms."

One of the best reasons citizens should demand shutdown of SSTGB and this for-profit tax collection scheme is that this plan creates serious "revolving door" issues and potential conflicts of interests between state taxing officials, individuals at the SSTGB, and the private companies which would collect sales tax.

We don't need to wait to see the scheme in full bloom to see how the revolving door might work and the potential issues it might create.

Consider, for example, the career of politician Joan Wagnon who is the chair of the Kansas Democratic Party. Wagnon was appointed to be Secretary of Revenue by Democratic Governor Kathleen Sebelius in 2003. She remained in this position until January 2011. During this tenure, she also served as President of the SSTGB and lobbied on its behalf.

In 2007, Wagnon testified in favor of passage of the Streamlined Sales Tax scheme:

Yes. What could be simpler. A politician appointed to a government post at the Department of Revenue for some state slides into the presidency of the private SSTGB. There, she contracts with private companies to give them rights to collect sales taxes on a for-profit basis. While at the SSTGB she lobbies Congress to pass "Streamlined Sales Tax Legislation." On the SSTGB's website, she is listed as a Kansas City "board delegate" of the SSTGB. She is listed as participating on the SSTGB vender compensation group, whatever that is.

One of the private companies hoping to profit from online sales tax collection has named itself "FedTax," even though the company has nothing to do with the federal government. This private company has even sought to trademark the expression "The Federal Tax Authority." On their trademark registration, the goods and services provided by the corporation are listed as "Providing temporary use of on-line non-downloadable software for tax management including calculating sales tax rate for a specified jurisdiction." The company is one of the newer "certified service providers" anointed by the SSTGB.

Where is Wagnon today? The private "FedTax" issued a press release announcing Wagnon has become "Executive Vice President" of the new company. The press release is dated March 10, 2011. So, about one month after leaving her Department of Revenue job, Wagnon was hired by a startup company hoping to profit from sales tax collection by keeping a percentage of the all the sales tax collected.

So, every time the complexities of determining and remitting state sales tax drive a business to use a "certified service provider," Wagnon stands to profit personally.

In the press release, Wagnon concludes: "FedTax represents the logical progression of my career, …"

Now, as citizens, we don't know that there are any improprieties in Wagnon's trajectory. But, even if Wagnon were of the highest integrity, we see the basic concept of the SSTGB and private sales tax collection invites "revolving door" relationships. Combined with a lack of transparency and the private nature of the parties involved, the potential for abuse is high.

Citizens should demand their elected state officials cease participating in this tax monstrosity called the "Streamlined Sales Tax Project."