Uniform sourcing forces tax changes

Two significant developments are creating opportunity for telecom tax software vendors at the state level.

First, the federal Mobile Telecommunications Sourcing Act, passed this summer, bases taxation for wireless services on the place of primary use, or the single address for state and local taxation of wireless telecommunications services, including charges for roaming anywhere in the nation. The law also mandates that states can either create a simplified database, or they can certify telecom tax software that is accurate enough to satisfy the tenets of the Sourcing Act. Telcos that use the certified software will enjoy “safe harbor” should they find out after they’ve filed their taxes that the information supplied by the software was faulty.

The law is aimed at the cellular industry, because 36,000 of the 55,000 taxing jurisdictions in the country tax mobile-phone users, and each taxes subscribers differently. The result: an overlapping taxation system through which customers may be taxed several times, in several jurisdictions, for placing a single phone call. Telcos can’t keep up with it all.

States have to fix their databases

President Clinton signed the act in July, but the law doesn’t go into effect until 2001. By then, states have to find a way to create an accurate and simplified database of taxing jurisdictions and their tax rates, or certify a tax software accurate enough to satisfy taxing requirements.

States are driving to create databases with accurate jurisdiction data that drills down to the ZIP+4 level, which is more accurate than relying on the traditional street address. Some states are just now beginning to look at simplifying those databases. The Florida League of Cities is researching jurisdictional data to come up with a simpler taxing system to present to the state Legislature, which must OK changes in statewide taxing methods. If passed, each locale won’t have to go through the legal process to enact each of their new tax configurations.

Cities, counties researching financial reports “Local governments throughout the state are compiling financial reports … to show what they collected and which services are available in those jurisdictions,” says Ken Small, the auditing and special projects manager for the Florida League of Cities. “It’s a nightmare for companies to figure out what to tax. We took a hodgepodge of state and local taxes and franchise fees for cable and telecom services, and we came up with a two-level tax that is uniform across all telecom services within a jurisdiction. Now telcos are going to have to determine only two things: are they in Florida, and which jurisdiction are they in?”

Florida has been working with two tax software companies on the simplification project: Group 1 and MBIA Inc. Small tested the Group 1 system for accuracy earlier this year. He fed the Group 1 software random addresses to see if it could name the jurisdiction in which the addresses resided. The software was tested for its accuracy in located addresses using ZIP+4, especially in finding addresses that skirt jurisdictional lines.

In one test, Small named a hotel on a side street that formed the boundary between Naples and unincorporated Collier County. “I would have bet my life they wouldn’t have gotten that. I wasn’t trying to make them fail; I used a good address number that was on the line. The software correctly placed the hotel in Collier County. It wasn’t perfect, but it was far beyond anything I expected.”

Florida has also used MBIA Inc., which has helped California identify its tax jurisdictions and manage and enhance revenue databases. Using geo-based information systems, MBIA monitors and analyzes revenue generated from a jurisdiction’s entire economic base by a number of factors, including revenue source, business type, industry and land use. Data cleansing, standardization, integration, enhancement and purging are among the services the company offers.

Colorado and Washington State are also simplifying their jurisdictions and tax tables. Other states are following suit, making state and local governments fertile ground for telecom tax developers. “There are a lot of jurisdictions that don’t have the assets that a tax software developer has,” Small says.

Creating uniformity in e-commerce taxes

The second significant issue under development involves creating uniformity for e-commerce taxes.

At least 31 states are involved in Streamlined Sales Tax Project 2000, which planned to launch a pilot in September to test existing tax collection software to simplify taxing between states, including scenarios of companies selling their goods across state lines via the Internet. The pilot will run for several months, with Kansas, Michigan, North Carolina and Wisconsin as the chief participants.

The stated goal of the project is to develop measures to design, test and implement a simplified sales and use tax system. Tax and revenue officials from each project member state meet monthly to discuss the creation of a simplified and modernized sales tax system. Under the plan, the states will use the 9-digit ZIP Code as the baseline for determining the appropriate tax rate.

Again, states will be responsible for providing a database that assigns each 9-digit ZIP Code to the proper tax jurisdiction and the appropriate tax rate. States will also be responsible for providing a database of tax rates for each tax jurisdiction. In addition, there will be limits on the frequency with which local tax rates can be changed, and a requirement that the state provide a notice of local rate and boundary changes. Changes in state sales tax rates will also require advanced notice.

In addition, the group is developing a series of strategic simplifications that can be presented to state legislatures in 2001 and is planning one or more pilot projects to test various technology applications and their impact on tax compliance.

“Uniform sales tax among the states is more of a Web-based taxation, e-commerce issue,” says Vicki Gibbons, staff specialist at the Wisconsin revenue department. “For instance, in Wisconsin, sales tax might be 5 percent for an item, while another state charges a different tax. Juice might be taxed in one state and not in another state.” One way to simplify the tax is to give the tax to the state in which the online shopper resides. “If I were to make a purchase on the Internet, I’d put in my ZIP+4 code, and the record would show where I was when I made the order,” she says. The record would then be used to determine which jurisdiction would collect the tax on the sale.

“One version of the test will require certified tax vendors to perform all the sales tax administrative functions for the retailers, including determining how much tax is due, remit the tax to the right state, and file the reports surrounding those taxes,” says Sabra Faires, assistant secretary for tax administration in North Carolina. “We expect some of the retailers in the test to be retailers who do online sales. We’ll test the interface between the vendor and the retailer, including online sales systems.” Information on the test can be found at www.geocities.com/streamlined2000.