SSTA, DMC Billing Postage Taxation Dispute

The ongoing dispute over the administration of the Streamlined Sales Tax Agreement (SSTA) remains in limbo despite a May meeting held expressly to resolve the issue. Member states of the SSTA and members of the Direct Mail Coalition (DMC) remain divided over the administration and interpretation of SSTA's charter to simplify and execute tax policy of state legislatures.

The DMC, comprised of direct marketers and billers who manage the bulk mailing requirements of many service providers, currently is lobbying the SSTA for decisions on its modified proposal to block any additional states that adopt the SSTA rules from leveraging new taxes on billing providers. In particular, the DMC wants to block the taxation of postage, which it views as unconstitutional; however, that is not the argument the DMC is making.

Its argument is more common sense than constitutional. The DMC claims that if administered according to the SSTA proposal, the agreement would require transaction mailers to collect on every item, including telco invoices, mailed for every state and local jurisdiction. There currently are more than 7,000 jurisdictions and the number is expected to climb.

“It is a very complicated subject and not many people are experts,” said Melanie Hill, tax consultant and coalition manager at the Direct Mail Coalition. “There are a lot of people that do high-level policy but not many at the audit level who see how these [mailers] have to keep records.”

To put the dispute in perspective, some history is required. In response to a Supreme Court ruling in May of 1992 known as Quill vs. North Dakota, the court established that states could not require out-of-state businesses to collect sales tax unless the business had a physical presence in the state.

This admittedly put local retailers at a disadvantage to catalog companies and, later, Internet companies that were selling to their customers without having to charge taxes in most states.

The structure and operating rules of the Streamlined Sales Tax Project were adopted in March 2000 and the SSTA was adopted by 43 states in November 2002. In November 2005, the SSTA became legally operative when its states represented 20 percent of the population. Its mission was and is to simplify the collection of taxes, in part by creating uniformity among state and local tax jurisdictions, a unified definition for products and services and other streamlining processes such as a centralized electronic registry for various state members and uniform sourcing rules.

Retail Sales Tax Compliance Costs: A National Estimate

What do you consider the greatest cost in collecting and remitting sales tax?

Retail outlets consider reporting, research and tracking local sales to be the bulk of costs by far when collecting and remitting sales tax. Direct mail providers believe the burden would get much worse if taxing, collecting and reporting become mandatory for the local jurisdictions to which they mail.

Source: National Opinion Research Center, University of Chicago and PriceWaterhouseCoopers, April 2006

The SSTA has a governing board comprised of the original 13 state members (Indiana, Iowa, Kansas, Kentucky Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota and West Virginia) as well as a Compliance Review and Interpretation Committee (CRIC).

Disputes ensued around the SSTA’s rules regarding sourcing — which is the determination of which state’s tax is collected on each piece of mail — and around postage and mailing services. Formerly regarded as untaxable, the inclusion of postage was seen by some billers as a way for the SSTA to increase the tax base, something they said the SSTA did not have the authority to do. For the record, the SSTA executives don’t believe SSTA has the authority to levy taxes and said that is not what it is doing.

“We try to focus on administrative issues; we get into policy only to the extent of finding one simple way of doing things,” said Scott Peterson, executive director of SSTA.

Of the 43 state members of the SSTA, only Nebraska currently is taxing billers for postage outside of the state in which it resides. However, the potential remains for more to do so unless agreements are reached.

Hill said taxation and delivery charges are just the tip of the iceberg when it comes to the impact of the SSTA on publishing, printing, direct mail advertising and transaction mail or billing services.

The coalition claims in addition to changing the sourcing rules that would require billers to pay taxes on bills and postage on the terminating end of the process (ergo the 7,000 taxing jurisdictions), it also is considering the taxation of every piece of mail according to a mailing list address, ancillary services provided by the mailer and electronic mailing lists.

There is invoices as a transaction while others see it as a service. Still others see it as tangible personal property. Some states have no regulation at all.

Billers ideally would like to see a ruling that makes postage non-taxable, but it is not only because of the price increase it would have to pass on to its customers. “It is because it would be an accounting nightmare,” said Richard Hoffman, vice president of operations and technical services at OSG Billing Services.

However, the cost is still significant. Hoffman said postage currently reflects up to 60 percent of one’s billing costs. So even a minor increase can make a big difference. If states that currently have no tax on postage decide to apply a tax, it could cost service providers whose postage, for example, is $100,000 per month (not unusual) up to $72,000 additional dollars per year at the average tax rate of 6 percent.

The DMC was formed in July 2006 and has been to Peterson a distraction ever since. Among the coalition’s goals are the following: elimination of taxation on postage and mailing services when they are separate from printed material sales; the adoption of advertising agency rules that allow agencies to pay tax to printers rather than to collect tax on the sale of direct mail campaigns; and eliminating the use tax on out-of-state direct mail.

Hill feels taxing postage is unconstitutional. She pointed to one case where a biller was audited, found not to have collected the tax, but was not told to pay the tax, only to start collecting it. “That’s just an intimidation tactic, because clearly if that tax was legal, the auditor would have been obligated to collect it and he did not,” Hill said.

Some states agree with her. Mississippi and Arkansas agree, but didn’t use the Constitution as the basis for their decision not to levy a tax. Subsequently, the issue has not come up before the U.S. Supreme Court.

Besides, nobody has yet to feel the real pain of an audit. “I don’t think people have been assessed yet, but if they are, they’ll be in court tomorrow,” Hill said. Regardless, constitutionality is not the basis of the coalition’s case. Hill said there are easier ways to win the argument.

“We began this with the position that postage on mailing agents should not be part of the tax base. Historically, it has not been. And we think it is poor tax administration policy to expand the tax base through administrative policy changes when it is unclear that the legislatures intended it that way,” Hill said.

The DMC since has compromised on its position. Its latest proposal to the SSTA draws the line at new members of the SSTA and seeks to prevent them from exercising their taxation powers unless their legislatures draft a separate bill and not simply because they have adopted the SSTA’s uniform definitions. The DMC proposal does not address the few states currently taxing or considering taxing postage, partly because the coalition finally has recognized what the SSTA has been trying to tell it all along.

“From the beginning, we were the wrong place to bring this concern. We said to go to the states, which they did, but the states told them ‘no’ and they came back to us,” Peterson said. “We have spent the last two years trying to convince people we are not the place to get a tax exemption, but for two years our lives have been consumed by a group of people trying to get that exemption.”

And by “people” Peterson means those at the DMC. “It has consumed our efforts over the last two years not because it is of importance in the field of taxation, [but] more so because of the complexity of the issues and the personalities involved,” Peterson said.

He added that those complexities are not generated by intricate tax code, but by the mailing industry itself. “They’ve got big business, small business, lots of buyers, lots of sellers, lots of people who do bits and pieces, and in the middle of that you have the federal government. It isn’t a very good way to get one good rule that applies to everyone,” he said.

This does not mean Peterson does not empathize with the coalition, or at least the companies it represents. “I’ve never felt their requests were not legitimate. I just always felt we were the wrong place to get what they wanted accomplished,” he said. “Their issue is just as valid as anyone else’s issues about making the process simpler and more uniform so the person collecting the tax doesn’t have to spend so much money collecting it. That’s all we’re about. We’re not about tax policy. It isn’t our responsibility or within our purview to tell states what to do.”

Besides, their beef isn’t any different that Amazon’s or any other company doing business over the Internet, Peterson said.

As for the issue of constitutionality or not of taxing postage, Peterson said, “I don’t know where people get that idea. I would like to see someone show me the court case, because I can’t find it.”

Although the Jonathan Mayhew phrase, “no taxation without representation” has been popular since he uttered it sometime around 1750, it never quite made it into the Constitution. However, OSG and others take it to heart in this issue.

“If OSG doesn’t have equal representation in a state and we don’t have a physical presence in the state, why should we be required to collect sales tax in that state,” Hoffman said.

He added that the more times the pending issues get tabled by the SSTA, the more controversial they become. “They sabotaged themselves right at the onset,” Hoffman said, “because they compromised on their principles, which were there was supposed to be this simplification and there hasn’t been.”

Hoffman and the DMC are encouraging other concerned billers, mailers and printers to lobby the SSTA’s governing board to keep it from allowing SSTA states the right to assess sales taxes on postage as part of the value of a print and mail service.

Conversely, Joan Wagnon, president of the SSTA Governing Board and Secretary of Revenue for Kansas, feels the SSTA has met its commitment to streamline the administration of taxes. In an address to Congress in December, Wagnon said, “I am here today ... to urge Congress to recognize that the simplifications we have achieved in our Member State’s sales taxes are sufficient to remove the burden on interstate commerce as noted by the Supreme Court in Quill v. North Dakota, and sufficiently simplified for Congress to allow states to require remote retailers to collect our sales taxes. That’s our goal: simplification and mandatory collection.”

A decision will have to wait until the groups reconvene.