Understanding Streamlined Sales and Use Tax

The Streamlined Sales and Use Tax Agreement is a governing document by which states that participate in the program must abide. Starting in 2000, Congress started debating whether remote sellers should have to collect and remit sales tax to tax jurisdictions. At the time, the problem was that sales tax across the country was inconsistent and far too complex for sellers to understand and process. The solution was found in Streamlined Sales and Use Tax, called SSUT or SST. In October 2005, the Streamlined Sales and Use Tax Agreement (SSUTA) went into effect. The SSUTA has four main pillars:  State Level Administration, Uniform Tax Base, Simplified Tax Rates, Uniform Sales Sourcing Rules. Of the 24 states and one territory (Washington, D.C.) that currently participate in the program, the idea is that a seller would be able to easily calculate, collect and file sales tax in any participating states with no special paperwork or steps to complete.

If you’re a regular reader of our blog or have subscribed to our newsletters, you’ll know that not all states administer sales tax and that some places still require you to file directly with the municipality that has a local sales tax rate. Arizona, for instance, is sometimes very confusing for companies because depending on the location of the sale, they might have to file with both the state and a municipality or just the state through the state administered program. The uniform sales tax base doesn’t mean that each state has to charge the sale rate but rather that the state has one set of rules for taxability at the base of every sales transaction.

Colorado is a good example of a state that doesn’t have a uniform tax base because of home rule, or where each municipal government gets to decide what’s taxable and what isn’t. Under uniform tax base rules, the each state decides on one set of rules to use for every location within their borders that is applied across the board. They can choose to exempt certain goods, like food, but it must be exempted everywhere, not just in a certain location. While there’s still a long way to go on simplified sales tax rules, the idea behind the third aspect of Streamlined Sales Tax is that rates are the same, just as taxability rules are the same. For instance, the base tax rate for the state on a certain class of goods should be the same in all locations, instead of 6% in one town and 7% in another.

While local taxes can be added on top of a base rate, the state mandated rate must be the same everywhere for the same goods. The final aspect is the most important to understand for companies that sell online or through orders of some other fashion that don’t have nexus in that state. For sales where a seller is in the same state as a buyer, the seller is obligated to collect the rate of the seller’s location, or “origin” sourcing. For sales where the seller is in a different state, the seller is obligated to collect the state rate where the buyer lives, or “destination” sourcing. Destination and origin sourcing rules are complex and a bit difficult to understand so we’ll be revisiting this topic soon. Be sure to sign up for our newsletter to get the latest on SST topics.

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