Response to Forbes “A Flat Sales Tax?”

Forbes just published an article entitled “A Flat Sales Tax?”. We feel it would be valuable and instructive to clarify some of the points of the article which provides a brief and not entirely accurate portrayal of the Streamlined Sales and Use Tax Agreement.

While it is true that the Streamlined effort puts in place a framework to standardize rates and definitions, it in no way constructs a “flat sales tax” as the title of the article might suggest.

The article also points out that to join the Streamlined effort several current “holdout” states (New York, California, Texas, Florida, Ohio and Illinois) would have to “change some of [their] most cherished and protected means of gouging consumers.” One side effect of the Streamlined effort is its tendency to bring such practices to light, and as they are a means of “gouging consumers”, perhaps changing these practices is duly warranted.

Specifically referring to the cited examples of these holdout states surrendering exemptions for particular items (the author references “cheap clothing” and “diesel fuel for agricultural use” among a few others), the Streamlined Governing Board (which is composed of representatives from each Member State) regularly revises what is referred to as a “Taxability Matrix” to allow Member States to guide the common definitions for exemptions to be used across all participating states. This matrix and other data is ingested by services like our TaxCloud service (available free of charge in Q2 2010) so that sellers and consumers never have to think twice about whether they live in Kansas or Washington, or are buying cocoa puffs or coats.

In its current form, the Taxability Matrix absolutely allows for thresholds to be defined such that particular classifications of items below a particular price could be tax exempt, and allows for local sales taxes to be levied (or exempted) on 900 numbers, parking, and yes, even a specific definition for fur coats (Streamlined does not mandate a single category for clothing as suggested in the article).

The article continues by describing how the State of New York has gotten restless in awaiting legislation necessary for the Streamlined effort to become adopted as federal law (The Main Street Fairness Act, soon to be introduced before congress). Last year New York enacted a law which redefines the concept of substantial nexus (i.e. “place of business”) to single-out Internet-based affiliate network businesses. Forbes readers should have significant concerns about this state legislation, because it could be interpreted to include any direct response mechanism (or for that matter, any contractual relationship) as it blurs the historical “bright-line” test of physical presence to determine substantial nexus, which is why we call it Complex Nexus. We have written about this in much more detail on our Blog.

In conclusion, we feel the Forbes article is both well written, and well-considered, but we believe some clarity on a few of its points would be helpful for readers.

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