US Streamlined Sales and Use Tax Agreement

State sales taxes in the US are under the control of the relevant state, leaving a huge disparity in compliance obligations and rules. The Streamlined Sales and Use Tax Agreement (SSUTA) is an attempt by over 20 states to harmonise their rules, and appoint certified compliance agents for single-reporting option.

SSUTA was created to address the complexities and inconsistencies in the collection of sales taxes in the United States, especially in light of the rise of interstate commerce and online sales. This agreement primarily aims to create a more efficient tax system that benefits both businesses and state governments.

Harmonising US sales tax compliance

SSUTA focuses on four major requirements for simplification of state and local tax codes:

1) state level administration;

2) uniform tax base;

3) simplified tax rates; and

4) uniform sales sourcing rules.

There are 23 participating states in addition to Washington D.C.

Background and Need for SSUTA

Sales taxes in the U.S. are administered by individual states, resulting in a patchwork of tax rules, rates, and regulations. Historically, these differences have created significant burdens for businesses, particularly those that operate across state lines or sell goods remotely. Before the SSUTA, businesses had to navigate various sales tax laws that differed not only by state but often by local jurisdictions within states, leading to complex tax compliance requirements. Additionally, the rise of e-commerce and remote selling further complicated the collection of sales taxes because many online retailers were not required to collect tax unless they had a physical presence (nexus) in the state where the consumer resided.

The challenge of collecting sales taxes on interstate and online sales led to a growing “tax gap,” where many states were losing out on revenue they were entitled to because sales taxes on remote sales went uncollected. In response to these challenges, state tax administrators, legislators, and business representatives came together to create the SSUTA in 2002.

The U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. further highlighted the importance of the SSUTA. The ruling allowed states to require remote sellers to collect sales taxes even if the seller did not have a physical presence in the state. However, the ruling also emphasized the need for states to simplify their tax systems to avoid creating undue burdens on businesses, a goal that the SSUTA had already been working towards.

Key Features of the SSUTA

The SSUTA is a voluntary agreement among participating states, and it focuses on several areas to create a more streamlined and consistent sales tax system. Key features include:

1. Uniform Definitions: One of the primary goals of the SSUTA is to standardize definitions for taxable goods and services. For example, the definition of “clothing” or “food” is consistent across participating states, reducing confusion for businesses about what is taxable in each state.
2. Simplified Tax Rates: The SSUTA encourages states to adopt uniform tax rates across local jurisdictions or to limit the number of rates within the state. This makes it easier for businesses to apply the correct rate to their transactions.
3. Uniform Sourcing Rules: The agreement standardizes the rules for determining the location of a sale (or “sourcing”) for tax purposes. For example, sales can be sourced to the location where the product is received by the buyer, making it clearer which state’s sales tax applies.
4. Centralized Registration System: The SSUTA provides a central registration system that allows businesses to register to collect sales tax in all participating states with a single application. This eliminates the need for businesses to register separately in each state.
5. Simplified Exemption Administration: The SSUTA simplifies the process for handling tax exemptions. Businesses can use a standardized exemption certificate across participating states, and states agree to accept electronic certificates, reducing paperwork and streamlining the process.
6. Technology and Tax Automation: The SSUTA encourages the use of certified tax software providers, known as Certified Service Providers (CSPs), who help businesses calculate and remit sales taxes accurately. Participating states often compensate these providers, reducing the cost of compliance for businesses.
7. State Conformity: States that join the SSUTA must agree to conform to the agreement’s standards. This includes adopting uniform definitions, simplifying tax rates, and adhering to the standardized processes for tax administration. States that do not comply may be expelled from the agreement, ensuring that there is accountability for maintaining the streamlined system.

Benefits of the SSUTA

The SSUTA offers numerous benefits for businesses, consumers, and state governments:

1. Reduced Complexity for Businesses: By standardizing definitions, rates, and processes, the SSUTA significantly reduces the complexity businesses face when complying with sales tax laws. This is particularly beneficial for small and medium-sized businesses that may not have the resources to manage complex tax compliance requirements across multiple states.
2. Improved Compliance: The simplifications introduced by the SSUTA make it easier for businesses to comply with tax laws, which can lead to increased tax collection by states. As more businesses are able to collect the appropriate taxes, states can close the tax gap and increase their revenue.
3. Support for E-Commerce Growth: The rise of e-commerce has made the SSUTA even more important. By providing a framework for simplified tax collection, the agreement supports the growth of online businesses while ensuring that states can collect taxes on remote sales.
4. Consistency Across States: The SSUTA creates consistency across participating states, meaning that businesses do not have to worry about differing rules and regulations. This helps foster a more level playing field for businesses that operate in multiple states.
5. Consumer Protection: The SSUTA also protects consumers by ensuring that sales taxes are collected accurately and fairly, regardless of where a business is located. Consumers are less likely to face confusion over tax rates or exemptions when shopping with businesses that comply with the SSUTA.

US Sales Tax rates and selling thresholds