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Table of Contents
 Ringtone Lawsuit Highlights Revenue Assurance Challenges
Telecom Billing Woes
March 16 Vote Could Tax Billing Services
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March 16 Vote Could Tax Billing Services
By Melanie Hill
{ Editor’s note: The Billing World & OSS Today Newsletter does not ordinarily accept contributions, but the following position statement calls attention to an upcoming policy decision that could sneak past a lot of radars, despite its obvious economic consequences. This contribution does not necessarily reflect the opinion of TeleStrategies or its employees.}
On March 16 at its meeting in Charlotte, N.C., the Governing Board of the Streamlined Sales Tax Agreement (SSTA) is scheduled to vote on direct mail proposals that will impact the profitability of billing service providers and the degree to which billing services are subject to sales tax. The vote will also determine whether U.S. companies, including telecom companies, will have to track all bulk mail, including bills and account statements, in order to pay tax on each piece to the tax jurisdiction where the mailbox is located.
The receipt of mail and business correspondence at the mailbox has not previously been the subject of a sales tax, nor have corporations been required to track bills and statements in order to comply with sales tax statutes. The vote will be a defining moment for businesses that rely on the Postal Service as a means of communication.
The proposed burdens aren’t being imposed by the Postal Service or Congress, but by the tax administrators and selected state legislators on the SSTA Governing Board.
What’s at Stake?
The vote may determine whether billing services are non-taxable services or the sale of printed material. This is important because outsource providers generally pay tax on the cost of materials used in providing a service. If billing services are regarded as a sale of printed material, tax may be imposed on the entire service transaction, which would be a substantial increase from what has historically been imposed in most states. Many corporations use back-office providers to increase their operating efficiency, but such efficiencies could be erased if shared services become taxable as sales of printed materials.
The Governing Board will also vote on whether bulk mail postage is taxable, and on whether mailing and sorting services are subject to sales tax as part of the sale of printed materials.
Tax increases may make it difficult for outsource providers in SSTA states to compete with service providers in non-SSTA states, but the greater impact could be the administrative and operational burdens imposed on business correspondence. This vote might require billing providers to file sales tax returns in every state and local tax jurisdiction represented in its customers’ account database. Resources will have to be dedicated to retaining mailing lists for every bulk mail item—a monumental requirement with Orwellian overtones.
These issues could be resolved by the Governing Board vote on March 16, but if it cannot do so—a super-majority is required to pass SSTA amendments and rulings—then there could be a two- or three-year delay. Regardless of when the vote takes place, 20 states will likely apply the outcome to your business retroactively, based on when each state passed SSTA legislation. If you didn’t anticipate how the Governing Board will vote and your business has nexus in any of the SSTA states, the vote could determine that your business owes these states back taxes, penalties and interest. Casting the votes will be delegates from North and South Dakota, Nebraska, Oklahoma, Iowa, Kansas, Indiana, Vermont, New Jersey, Rhode Island, North Carolina, West Virginia, Minnesota, Michigan and Kentucky.
If your state is not listed as a Governing Board delegate, don’t presume that this scenario has no relevance to your business. The board vote will also carry authority in all states that pass SSTA legislation in the future. By the end of the year Tennessee, Wyoming, Utah, Ohio and Arkansas are expected to pass all SSTA provisions, and legislation has recently been introduced in Illinois, Idaho, Washington and Wisconsin.
Ignoring Contract Law
Since a 75 percent vote is required to pass SSTA amendments and rulings, a few states could block the passage of the interpretive rule needed to clarify that postage purchased by a Mailing Agent is not part of the sales price of printed material. If this happens, some SSTA states have indicated that they will not tax postage purchased by a Mailing Agent while other states will tax such postage. The result will be that the SSTA states have uniform statutes with a non-uniform interpretation; uniformity on the statutory books but not in real-life application. There is very little reason for businesses to support the SSTA project if it means that states will not interpret the statutes uniformly.
The vote will be based on whether the SSTA sales tax system should recognize contract law in determining where and when a sale occurs. Billing service providers typically sell their services at their location, not at the mailbox where the billing is delivered by the Postal Service. If contract law is followed in the application of sales tax, the jurisdiction taxing the billing service would be the location where the service provider does business, not the place where the mail is delivered. The vote will also determine is states may impose a sales tax postage purchased through a mailing agent and whether the SSTA will create a national tax administration system where sales tax is paid on every piece of bulk mail based on the mailbox address. The cost of administering sales tax on billing services will increase greatly, with no perceptible benefit to your customer. Will your customers agree to pay more for the same services, or will they seek service providers in states that have not passed SSTA legislation?
To make matters worse, the burdensome direct mail sourcing rules do not provide any tax policy benefit and will likely have an effect opposite of what was intended by the states participating in the SSTA project. Although the SSTA project intends to increase tax collection by out-of-state service providers, the continued misapplication of the direct mail sourcing rules will likely decrease tax collection by in-state and out-of-state service providers. The SSTA project intends to simplify tax reporting for billing outsource providers, but instead results in an increase in the administrative burden to outsourcers and their customers. Billing providers and/or their customers may be required to file sales tax returns for a single job in thousands of jurisdictions, depending on the size and distribution of the database, rather than a single jurisdiction.
Taxation of Postage on Business Correspondence
The purchase of postage by billing outsourcers on behalf of their customers is a common practice. It’s typical for billers to use their own postal permit when acting as mailing agent for multiple customers. It’s also typical for postage funds to be advanced to the mailing agent for the purpose of purchasing postage on behalf of the customer. It is not uncommon for the funds to be in the form of a check made payable to the postmaster. These procedures are necessitated by Postal Service regulations and the operational logistics of running one of the largest government agencies in the world. It’s not typical to regard the postage as part of the sales price of the paper used in providing the billing services, nor is it typical to tax separately stated postage as part of the sale of the billing services.
Some states are now asserting that postage payments made out to the postmaster will be subject to tax if they show up in the service provider’s postage permit account maintained by the Postal Service. This account is typically not audited in connection with a sales tax audit, because it has generally been understood to represent funds on deposit with the U.S. Postal Service.
Many states participating in the SSTA project now assert that these funds are part of the taxable sales price of the printed material or billing service. Some states discredit the fact that the mailing agent certifies its agency status in writing to the Postal Service under federal criminal penalties stricter than, and in addition to, the civil tort law surrounding typical agency relationships.
The Governing Board voted on this particular issue at its December meeting in Seattle, and the resolution to recognize agency relationships and contract law with regard to postage purchased by agents failed to pass by two votes. The resolution was rejected by New Jersey, North Carolina, Minnesota, Nebraska and Kentucky. Although a majority of the Governing Board voted in support of the postage resolution, a super majority is needed to pass it.
Delegates in Michigan, Oklahoma, South Dakota, Indiana, Iowa, Kansas, North Dakota and West Virginia supported the initiative by voting that postage purchased through an agent is not taxable when separately accounted for by the mailing agent.
Economic studies prove that a postal rate increase would retract the printing and mailing industry by 20 percent, reducing jobs and revenues. Although the direct taxation of postage purchased through a mailing agent is an additional cost of doing business comparable to a postal rate increase, the unintended consequences may be just as costly. Can billing providers in New Jersey and other SSTA states afford to collect tax on postage and mailing services, when their competitors in Pennsylvania and other bordering states do not? Not likely.
The SSTA rules are disproportionately complex for small businesses, which could cause the number of service providers to be reduced by the SSTA project rather than the normal forces of a competitive market economy. To avoid the impact of the direct mail provisions, U.S. companies could be forced to change their business operations and structures to models that are less efficient and contrived. For example, companies in SSTA states might opt to split into multiple corporations so that billing and mailing services are sold by different entities—a change that would be driven by poor tax administrative policy rather than efficiency.
The impact will disproportionately hurt small businesses, and the National Federation of Independent Businesses is concerned about the ramifications. Small customers of billing service providers could be required to secure their own postal permits in order to avoid the tax, creating additional expense and an administrative burden. Large storefront retailers with in-house tax resources will be more able to self-assess the tax they owe on promotional materials, but the impact on the billing service industry and its customers in finance, insurance, utilities and other corporate sectors will be negative. Even large corporations may end up paying higher postal rates, since a tax on postage may dilute the benefit of commingling and mail consolidation. The first order of business for sales tax simplification should be “do no harm.”
The Association for Postal Commerce, the Mailing & Fulfillment Service Association, the Envelope Manufacturers Association, and the Printing Industries of America/Graphic Arts Technical Foundation and its state and regional affiliates are concerned about the upcoming vote. These associations and their members assert that postage purchased by a corporation through a mailing agent to deposit bulk mail at the post office is not a taxable event. A coalition has been formed to address these issues and to seek a return to the historical approach to taxing billing and direct mail service providers.
An Opportunity for Course Correction
After the failed December vote, the Governing Board added the issues to the agenda for its March 16 meeting in Charlotte. The problems created for billing services and direct mail can easily be corrected by returning to the historical application of contract law to billing service contracts and by recognizing agency relationships. A return to the status quo for the taxation of billing service providers is still within reach. The Governing Board vote will determine whether tens of thousands of companies will be cast into retroactive non-compliance. It faces a dilemma: correct erroneous assumptions made by the SSTA Project in its formative year of 2002, or forge ahead regardless of the negative and unintended consequences. The SSTA created the problems for billing service providers; it has an opportunity to rectify the situation by a single affirmative vote.
Ms. Hill is a tax specialist with Dow Lohnes Price tax consulting group, affiliated with the Washington, D.C.-based law firm of Dow Lohnes. She can be reached at mchill@dlptax.com. The Direct Mail Coalition will sponsor a telephone conference for billing service providers; call-in information can be obtained from Carole Fralick at 864-241-2142 or by email at cfralick@dowlohnes.com.
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