Sales Tax Clearinghouse Response to the
Working Group of the Streamlined Sales Tax Project

General Questions

1. Availability of technology that can assist with the administration of sales and use taxes in a multi-state environment, including the use of the Internet for that purpose:

Sales Tax Clearinghouse (STC) announced, on February 15 of this year, its software and services to help merchants conduct sales tax compliance over the Internet. STC provides merchants with either a software module that plugs into their business system or online forms to calculate taxes and post their transactions.
STC then licenses, files, and remits with any and all tax authorities into which their sales reach.

2. Current availability of software to deal with multiple rates, tax bases, and exempt purchasers and transactions; with interfacing with retailers:

Currently, STC’s rate calculation software is ZIP code-based, covering 42,000 ZIP codes with three levels of tax rates: state, county, and city; 32 product categories, and four exemption classes.

3. General requirements and processes for determining taxability of various goods and services:

Merchants must have a connection to the Internet as all calculations are performed over the Internet rather than using locally downloaded data to ensure accurate and up-to-date rate information. The merchant’s business system invokes STC’s calculation module with the product category code and the ZIP code of the shipping address. The module connects to one of STC’s servers to return three individual rates. When the purchase is completed, the merchant’s business system then invokes the same module with the same information as above along with a transaction amount, before taxes, to post the transaction with STC. The merchant receives a Transaction ID to tie transactions to remittances in case of an audit.

4. General requirements for conducting such a simplified system, including processes for registration of parties to the system, calculation of taxes due, methods for remittance of taxes and filings related thereto; treatment of exempt purchasers and exempt transactions, and the like:

Merchants must register with STC, providing name and place of business, primary contact information, Federal EIN, locations of nexus, any and all local tax license and account numbers, and bank account routing information for the transferring of collected taxes. STC is responsible for licensing merchants with any and all tax authorities into which their sales go. STC files and remits to the tax authorities on a periodic basis, as they require, by any means they make available, either paper or electronically. Merchants must post exempted transactions because most tax authorities require the inclusion of both gross as well as taxable receipts.

5. General standards for collection/remittance software performance accuracy under such a system:

STC considers five factors essential in providing tax compliance services over the Internet:

i. Availability—a merchant must always be able to complete a transaction;

ii. Speed—calculations and postings must be completed within one second and three seconds, respectively;

iii. Privacy—identifying information about the consumer must never be exposed over the Internet;

iv. Security—transactions must occur over an encrypted channel and data must be secured; and

v. Accountability—there must be some association between filing records and merchant transaction records.

6. General types of costs and compensations to consider for the creation and operation of such a system:

Typical costs associated with a data processing center include servers, technical staff, administrative staff, support staff, management, and, in this case, tax specialists and money transfer fees. Individual licensing fees in hundreds of home rule locations amount to thousands of dollars that must be paid even if remote sales are minimal and not repeated. A collection fee in the range 2 to 5% should adequately cover such expenses, depending on the level of simplification of product categories and locating systems.

7. General requirements for protecting the privacy of individual consumers under such a system:

There is no need to convey any consumer information over the Internet—only data relevant to tax determination, such as location, product category, and amount.

8. General requirements to ensure availability of the system to users and recovery plans for system interruptions:

Redundancy is the key to availability, both within a server location and across the Internet. STC has several mirrored servers across the country to ensure 100% availability.

Tax Base, Uniformity, and Exemption Administration

1. Which standardized product coding systems do businesses currently use:

a) United Nations Central Products Classification System

b) North American Industrial Code System

c) Other?

2. Do you know if there is one system that is used more often than any of the others? Which one is it?

3. Do software vendors use any of the product coding systems in their software (e.g. - as the basis for their tax base/classification modules)?

Large merchants have staff solely responsible for mapping their products to vendors’ product codes. The average taxpayer cannot possibly assimilate distinctions between thousands of product codes. STC submits for consideration a simplified list of product category codes that will be essential in any effort to bring a unified system to all taxpayers. (see attached)

4. What aspect of state tax laws provide the most difficult challenges in terms of creating universal tax compliance software? Which are the areas of tax law that are most troublesome to program? Would programming/compliance be easier or cheaper if states amended these areas of tax laws?

a) Location identification—ZIP code boundaries mostly, but not entirely, match political boundaries. Either, extraordinary efforts are required to delineate down to individual street addresses, or taxpayers in fringe areas will be improperly assigned, or tax authorities need to re-align to existing ZIP code boundaries.

b) Product category codes—it is impossible for most merchants to properly assess product classifications with some 4,000 categories to choose from. Clearly, this number needs to be reduced to a more reasonable number in the neighborhood of a few dozen clearly delineated categories.

5. Are there changes in state laws that could be made that would make it easier, cheaper, and/or less burdensome for businesses to map their products to a standardized coding system? If yes, what are those changes?

Yes—reduce the number of product categories. Having countless delineations between such minute factors such as “mini marshmallows” and “large marshmallows” makes it impossible for average merchants to properly classify each and every product they sell without legions of tax experts. Additionally, it is crucial that states agree on a standard that will be used by all.

6. Is it feasible to translate a vendor's existing product coding system into a standardized coding system so that businesses don't have to reprogram their computers or replace their existing product coding systems? If yes, is this a relatively expensive or inexpensive operation for software vendors to do?

It is possible to translate existing codes into standardized codes as long as an authoritative body defines and agrees upon what the thousands of mappings should be. The coding is the easy part relative to the mapping process that must occur first.

7. How frequently are you willing to update your software so vendors can add new products? Daily? Once a month? Once a quarter?

This is one of the reasons that this project should strive for a small list of product category codes—to make the need for such changes moot. STC is capable of handling such changes on a daily basis as such data is resident on our servers rather than propagated down to the merchants. The real problem is the merchant’s ability to be able to understand and integrate these changes, however often they may be made.

8. How frequently are you willing to update your software to change the taxability status of a product for a particular state? Once a month? Once a quarter? Once a year?

STC is capable of handling such changes on a daily basis, but, again, it is the merchant’s difficulty in handling such changes, on any basis.

9. In most states, items and services are either taxable or exempt. However, in some states some purchasers are either taxable or exempt. However, in some states some purchasers are allowed to claim a tax exemption based on who they are or how they plan to use an item or service. Typical reasons for these exemptions are items for resale, materials consumed in industrial production, or status as a non-profit organization. If we want to know the reason for a particular exemption, can you accommodate an exemption form for each state (for example, using a pop-up screen for each state)?

STC uses a short list product category codes and taxpayer exemption classifications. If a purchaser informs the merchant that they are exempt for one of a few standardized reasons, the merchant calculates and posts the transaction with the relevant coding for that reason; otherwise a standardized product category code is used and STC returns the taxability of the product in the specified location.

10. If a purchaser wants to order 10 items and claim an exemption for 6 of them, how would the software vendor recommend that this be handled?

Since each item may or may not be taxable in a given jurisdiction, the tax on each individual item must be calculated, or at least aggregated into separate product categories. Additionally, the tax rate or exemption for shipping and handling charges must be separately calculated.

11. Can you deal with different types of ID numbers so we don't have to develop a universal numbering system for all states? We have discussed using a two-digit field for the sate identifier and another field that would have as many digits as the longest state ID number (probably the federal ID number) in place of developing a new numbering system.

STC is capable of handling individual ID numbers for a taxpayer in each of the over 6,000 tax authorities. STC also handles further delineation, such as in Alabama, which has different account numbers for each type of tax return, rather than a single taxpayer ID.

STC would obviously prefer to use a universal ID such as the Federal EIN. Wherever possible, significant benefits and incentives should be given to those who simplify rather than carry on archaic practices.

12. If you designed a software program to verify ID numbers, would you prefer to have a frequently updated database of all states exemption numbers, or access to each states websites for verification as necessary? If the latter, what would you recommend when the website is unavailable?

State, county, and local tax authorities should not be responsible for being 100% available online as the tax service providers must be. Exemption information should be published to the service providers with the same mechanism and frequency as tax rates and product category codes are, preferably monthly.

13. How long would it take the software program to determine that a particular ID number is valid if we wanted to verify ID numbers at the point of sale? How expensive would this process be to design and operate?

Programming such a mechanism is not really the issue as such a determination can be made in the same time period as product taxability and rates. Rather, having every single purchaser identify to every merchant their local identifier, or identifiers, in the case of multi-state transactions, in order to be verified is not practical.

Purchasers should be universally exempt or not, such as charitable organizations and resellers—all others are simply not ever exempt.

14. We are curious about how the envisioned software will integrate with a vendor's automated accounting system. What are the client requirements necessary to use your system? Are these proprietary to this specific solution or can the client leverage existing technology investments?

STC’s software plug-ins are available for a number of different platforms, such as Windows and Unix, and are very easy to integrate. Some form of programming is required to get their business system to use a plug-in to connect to our servers. STC will make its interface available to many different platforms, such as SAP and Microsoft Commerce Interchange Pipeline.

15. Are there any software design constraints that we should be aware of or are you able to design whatever it is we want?

STC’s business model already is to accommodate tax authorities through whatever means necessary. We will continue to do so with and for this project.

16. What security and redundancy features do you intend to incorporate? What happens when the system experiences an outage or failure (telecommunications blackout, "denial-of-service" attack, and software/hardware failure)?

STC specifically addresses such issues and guarantees 100% availability. With servers distributed around the country, a merchant is guaranteed to be able to reach at least one of them, regardless of any single outage or failure in and around the net. Additional security comes from encrypted (SSL) communications over the Internet, firewalls to protect the data on servers, and triple password protection controlling the transfer of funds.

17. Will you maintain a redundant program and databases?

Yes.

18. Recent surveys indicate that consumers are still wary of online data gathering. Share your thoughts on rectifying or ameliorating this concern such that a system like the one being proposed will gain widespread acceptance.

STC believes that no consumer information should ever be conveyed for tax determinations other than location, product categorization, and amount. STC returns a transaction ID to the merchant so that filings can be associated with transactions by the merchant in case of an audit.

19. What are your expectations of the states, the merchant and yourself regarding evolutionary technology upgrades and system improvements and enhancements during the course of the pilot? Who do you expect will manage this?

STC expects states to simplify and define clear procedures that we will implement.

20. How long will it take you to design the software after we define the specifications? Could you have the program done by this fall?

STC is already providing such services and should be able to quickly adapt to whatever specifications are defined. One should expect about two months turnaround from specifications to their implementation to be fully tested and ready to be used.

Tax Rates, Registration, Returns, and Other Remittances

1. Describe how you would accommodate the current structure of local option rates in a system that you designed.

STC has encoded over 6,100 individual tax authorities, each with varying reporting requirements and procedures. The purchaser’s location is signified by a ZIP code to determine the appropriate tax authority for a transaction; a simplified list of 32 product categories is used to determine taxability of an item; and the system returns three tax rates for the state, county, and city levels, if any. STC then licenses, files, and remits with each tax authority on behalf of the taxpayer as required.

2. What changes could states adopt that would make it easier for you to develop your software while still preserving local option rates?

a. Consolidate for each state a single point of registration and filing for all local option rates within the state rather than having independent agencies. CO, LA, AL, AZ in particular portray the difficulties.

b. Align tax jurisdictions boundaries with ZIP code boundaries.

c. Harmonize and radically simplify product category codes and exemption classifications.

3. What information would you need from local option states so that rates could be accurately assessed at the time of the transaction (i.e. digital maps of local taxing jurisdiction boundaries, rate tables that include some type of address identifier, others that you would suggest)? Do you have recommendations on any of these options?

In lieu of the simplifications mentioned in #2 above, states need to accurately and completely define jurisdictional boundaries in terms of hundreds of thousands of discrete address segments. Since we have an opportunity to introduce simplifications with this project, we should make every effort to utilize a simplified locating mechanism such as ZIP code.

3b. Do you have any comments on the availability of any of this information (if the state doesn't already have it) or the potential costs involved with developing or acquiring it?

Geo-coding exists, but all it does is pinpoint a location. What does not exist is the boundary information that encloses these discrete locations within each jurisdiction.

Colorado is a particularly difficult state in this regard. Tax service providers routinely have to call home rule cities directly to ask which jurisdiction a particular address is in. The onus should be on the difficult jurisdictions to supply complete data or to simplify.

3c. Are there technical issues regarding the format of the information that will be provided by the states that we need to be aware of?

Typical issues include standardized record definitions, codings, effective dates, and a mechanism to acknowledge the of transmission or receipt of data.

3d. Are there advantages/disadvantages to accessing this data real time from a state maintained database vs. having files made available by the states periodically?

State, county, and local tax authorities should not be responsible for being 100% available online as the tax service providers must be. All data should be published to the service providers on a periodic basis.

4. If the states are providing the boundary and rate information to you, what are your suggestions concerning the frequency, timing and advanced notice of boundary and rate changes?

STC is capable of handling such changes on a daily basis, but monthly is preferable to make the comprehension and integration of changes easier for taxpayers. There is no reason to have more frequent changes than that.

5. Please discuss the reliability of the data that you will utilize to determine the situs of a transaction? For example, if you will use address information provided by the U.S. Post Office, how often is it updated and how accurate do you think it is?

Many businesses require accurate address information, and the Post Office has always been rigorous in maintaining its database. There is an enormous loss of reliability, however, by asking 6,000 individual tax authorities to define their boundaries, even using pinpoint locating techniques. These offices are not equipped to create or maintain such data. Alternately, having independent service providers generate their own boundary definitions also greatly reduces the reliability and consistency of that data.

6. What degree of accuracy would you expect in calculating rates and what are options for situations when the situs of the transaction cannot be determined (the delivery address is not matched to a specific taxing jurisdiction or if the system is down)?

The system can never be down! Merchants must be able to conduct business at all times, without fail.

Transactions from unidentifiable locations should use as much granularity as is available, so at least the state tax rate can be applied.

7. Are there additional development costs or additional ongoing costs for a system that accommodates local rates?

Having 6,000 distinct tax authorities is a manageable number. If it were possible for states to integrate their local rates into a single state-rate that was apportioned, there would be no need for this project.

ZIP codes, on the whole, are 99% accurate, meaning that 99% of all consumers in the U.S. would have a correct tax determination applied if based solely on their ZIP code. Tax authorities need to carefully assess their need to gain that extra 1% of accuracy to collect an average differential rate of another ½% or so against the system costs of implementing a perfect degree of location accuracy. Using geo-coding raises costs, error rates, and response times roughly by a factor of three, only to gain, at most, an additional 0.0005% in revenues.

8. Are there additional accuracy/reliability issues for a system that accommodates local option rates?

9a. Will systems that are developed to accommodate local option rates be more difficult or costly for retailers to use?

No, unless the costs of administering this system isn’t borne by the states, in which case costs must be shared or wholly supported by the retailers.

9b. Will any additional information be required from the purchaser at the time of the transaction in a system that includes local option rates?

Depending on the resolution of other matters, such as whether each individual tax authority can have its own taxpayer ID (or ID’s!), purchasers may or may not need to identify themselves to the merchant, e.g. “Opelika ID #xxx; Lee County ID #yyy; Alabama ID #zzz”.

Registration

1. What are your suggestions on how registrations should be handled for vendors that wish to use this system?

Vendors that subscribe to STC’s services register on our website, providing such information as business name, location, primary contact information, Federal EIN, locations of nexus, any and all taxpayer license and account numbers, and bank account routing information. They receive a Merchant ID and the necessary software from the STC to calculate and post transactions.

Returns

1a. What are your preferences concerning the frequency of filing and the due dates for returns

STC is capable of handling the full range of filing frequencies, from daily to annual, as required by each tax authority and the thresholds that each individual merchant reaches. Most typical is monthly filings that are due on the 20^th of the following month, or annual if receipts do not exceed $100. Receiving interest on the float of these funds is critical for service providers to partially offset the costs of administration.

1b. Would staggered reporting dates (by vendor or by state) be beneficial to you?

It would, but then reporting periods would most likely not be aligned with calendar months which would add more complexity than it saved. The only downside of unified reporting dates is the size of the servers required to handle peak loads rather than balancing throughout the month.

2. What are the costs/difficulties for preparing returns for local option states vs. one rate states?

There is relatively little additional difficulty when the local option rates are all reported to the state. On the other hand, several states, as you know, have individual local reporting agencies, usually without any electronic interface available, which does increase costs dramatically. Additionally, the licensing and registering with these local agencies can cost anywhere from $5 to $50, multiplied by hundreds!

3a. What information would be captured by your system that could be included in the return?

STC captures location, product category code, amount, and a timestamp.

3b. What are the costs associated with including this information on the return?

STC formats the above information along with taxpayer information in whatever format is required by each individual tax authority.

4. Discuss the issue of returns that are filed late.

This should never happen.

5. What are your suggestions on how subtractions could be accommodated on the return (bad debt allowance, returned merchandise)?

STC subtracts negative amounts for returns from daily totals. In the event that a credit is owed by a tax authority in a particular reporting period, STC applies for a refund with that tax authority that in turn is refunded back to the merchant.

Remittances

1. How would you propose the remittance process work?

STC debits the merchant’s account on a daily basis for the taxes that have been collected. Based on the reporting requirements and thresholds of each individual tax authority, STC files and remits anywhere from daily to yearly for each taxpayer. Funds can be routed directly to tax authority accounts via ACH. Some sort of batch processing would greatly help the process, to file and remit for a large number of taxpayers rather than individually.

2. Discuss the issue of remittances that are not paid or that are paid late. How would the various state provisions on penalty, interest and waivers be applied?

In the case of automated postings by a merchant, STC is responsible for filing in a timely manner all such reported receipts and will assume the responsibility for any penalties incurred from late filings that are of its own doing (not outside of its control). For filings and remittances that are initiated manually at a date after their due date, STC implements the penalty, interest, and waiver formulas that are defined by each tax authority.

Other

1. Do you have any comments ho how to deal with state that have "sales tax holidays"?

2. How do you think your system can be beneficial for mail order sales, phone order sales and over-the-counter sales?

STC’s system applies equally to all forms of retail sales, regardless of medium.

3. Can you share with us information on how you price your services and how your relationships with vendors are structured?

STC charges a monthly fee for a subscription to determine and calculate taxability and rates; there is an initial setup fee for the software to automate calculations and postings; and a transaction fee on filings and transfer of funds.

4a. What suggestions would you have on how the process for certifying tax rate systems would work?

Any transactional system must allow for its own testing by being able to designate both test participants (merchants and tax authorities), as well as test transactions that may be communicated and responded to as normal.

4b. What suggestions do you have on issues such as standards of accuracy, methods of testing, etc.?

The central administration responsible for defining procedures should also define a transaction test suite as a benchmark for validating a service providers system.

5. What safeguards will be built into the system:

a. To insure confidentiality of customer information and:

No customer information should ever be conveyed within this system.

b. To prevent misuse of information by third parties for non-tax administration matters?

Without any customer information, service providers cannot abuse their privacy.

Audits should be conducted by the administrative board on behalf of states to verify that all transactions are being properly reported.

STC’s Proposed Product Category Codes

Sales Tax Clearinghouse Response to theWorking Group of the Streamlined Sales Tax Project