One of the goals of the OECD’s base erosion and profit-shifting project is to achieve a level of uniformity in countries’ domestic laws, particularly those that address the international movement of goods and services.
The U.S. states and multistate taxpayers have likewise longed for more uniformity on certain issues. States are permitted a great deal of leeway in the creation and administration of their tax systems, and the result is that state tax systems vary greatly. For a multistate taxpayer, this creates compliance challenges. Taxpayers not only have to figure out each state’s tax laws, they also have to determine how to apply those laws, keep separate records for each state, and file additional documents and forms. And because laws don’t remain static, taxpayers must track proposed and enacted changes to each state’s tax laws to ensure proper compliance.
Given all that, it’s not surprising that uniformity seems like a panacea.
The benefits of uniformity are not limited to reducing cost and complexity for multistate taxpayers. There are also benefits for state tax authorities. If corporate taxpayers have an easier time complying with states’ requirements, state tax administrators will receive more accurate returns. That could reduce audits and mean that less time and money would have to be spent in enforcement and collection actions. More uniformity would undoubtedly be beneficial in that it could reduce the cost and complexity of taxpayer compliance and tax administration.
Assuming uniformity is beneficial, how can it be achieved? Unfortunately, there are only two options: voluntary agreement or legal compulsion. Voluntary agreement is the most inherently pleasing of the options, but is difficult to achieve. The states have made several attempts at voluntary uniformity, and none have entirely succeeded.
For example, the Uniform Division of Income for Tax Purposes Act was developed to provide states with model rules for the allocation and apportionment of a multistate business’s income to the states in which the income was earned. To their credit, many states that impose a net corporate income tax have adopted all or part of UDITPA or use a three-factor apportionment formula. However, because states are still free to choose their own formula or to adjust the importance of factors in the apportionment formula, a growing number of states are turning to the single sales factor as a means of encouraging local development.
The Streamlined Sales and Use Tax Agreement is another attempt at voluntary uniformity. The goal of the streamlined effort is to simplify sales and use tax laws and collection practices to ease the administrative burden on tax authorities and merchants and to facilitate a congressional or U.S. Supreme Court override of the physical presence nexus standard that applies as a result of the Court's decision in Quill Corp. v. North Dakota. There are 44 participating states, of which 19 are member states and three are associate member states. Member states have brought their sales and use tax statutes into compliance with SSUTA. Although the streamlined effort has had some success in creating more uniformity, it has not yet achieved complete uniformity and faces significant challenges in achieving its goals.
In the end, although uniform definitions and model rules are helpful, they have not produced nationwide uniform tax treatment. In all reality, it is unlikely that uniformity across all taxing states can be achieved through voluntary efforts. And even if states were able to come to a nationwide agreement, there is no guarantee how long that agreement would last. With a voluntary agreement, each state could still be free to interpret and administer the terms of the agreement differently. That would effectively negate some or all of the uniformity achieved. Alternatively, if states believed it would benefit them fiscally to leave the agreement, they would likely do so.
The other option for achieving uniformity is legal compulsion. One glance at efforts to pass federal legislation permitting states to require remote sellers (that lack a physical presence in the taxing state) to collect and remit sales tax reveals just how challenging the process can be. Congress has historically been hesitant to act on issues involving state taxation, preferring to leave them to the states.
Even those states that have passed legislation or regulations with the hope of a constitutional challenge that ends up before the U.S. Supreme Court must remember that the Court is limited in its ability to create uniformity among the states. The Court can only decide the case and the fact pattern presented to it. Rather than dictate what states must do, the Court prefers to issue decisions telling states what they cannot do.
Uniformity in tax laws is a lofty goal, whether between U.S. states or foreign countries. Still, it is worth discussing how uniformity in tax laws could benefit taxpayers and tax authorities. While I remain a believer in the idea of federalism, I understand that some uniformity is necessary in our increasingly multi-jurisdictional world.