Does Automation Make Sales-Tax Administration Easier?

"Does automation make sales-tax administration easier?"

Four states this month will go "Live" with pilot systems for calculating and remitting sales and use taxes for both Internet and brick-and-mortar purchases. You can bet that partisans on both sides of the e-commerce tax debate will be closely watching the technology trials in North Carolina, Wisconsin, Michigan and Kansas.

Why the interest? The antitax camp says the expense of collecting sales taxes creates a heavy burden on sellers, especially smaller merchants. But those who support wider taxation authority have countered that automation will dramatically shrink the cost of compliance. The pilots should shed some light on whether technology makes tax administration easier.

The tests are part of the Streamlined Sales Tax Project (, which seeks to simplify the sales and use tax administration. Thirty-two states currently are voting participants in the project, although such tech-oriented states as California, Massachusetts and Virginia remain holdouts.

"The states realize they have to do something to simplify the process," says Elisa Corridore, VP of sales and marketing at Taxware International, which is the prime contractor on two of the tax projects four pilots.

Taxwares software, hosted on a remote server, calculates the tax rate for a given transaction and sends it back to the merchant. The company says it covers all U.S. tax jurisdictions via a master file, updated monthly. Each transaction is stored in an audit file, and the data is used to determine the amount to be deducted from the merchants bank account and remitted to the state.

Corridore says Taxware has done this sort of thing before. The company developed software to calculate federal and state excise taxes on transportation fuels. MasterCard International uses the software for its government fleet card program, which lets federal agencies purchase fuel via credit card.

The pilot systems, meanwhile, represent one stage of the Streamlined Sales Tax Project. The other element is a model for simplified tax administration, featuring uniform definitions and tax rates. Since March, four states have passed sales-tax simplification legislation with 22 other states considering legislation, according to the organization.

The simplification effort dovetails with federal legislation that would expand the states taxation authority. Sen. Byron Dorgan (D-N.D.) introduced the Internet Tax Moratorium and Equity Act, which would authorize states to require remote sellers to collect sales taxes. But to compel such taxation, the bill requires states to adopt a simplified sales-tax system.

For now, the Supreme Courts 1992 decision in Quill v. North Dakota is interpreted as limiting the states ability to tax remote sellers. In the courts opinion, sellers are required to collect sales taxes only when they are based in the buyers state or maintain a substantial physical presence in that state. But the decision also states that "Congress remains free to disagree with our conclusions."

If Congress disagrees, the technology being piloted could emerge as a key method of compliance. The testing phase will lead to an RFP for production systems. The results should prove interesting.