Radical move? States try tax outsourcing

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By Patrick Thibodeau

(IDG) -- A small group of companies is participating in a project to outsource sales tax collections. State government backers of the project hope it will revolutionize the way sales taxes are collected and paid.

Taxware International Inc. in Salem, Mass., and subcontractor Hewlett-Packard Co. have developed a transaction server that interfaces with a merchant's retail system via an Internet connection to automate tax calculation at the time of sale. The system was expected to go live late last week.

What makes this project groundbreaking is the agreement by participating states to test and then certify the accuracy of the vendor's software, as well as shift some of the potential routine tax audit liability -- a major burden for businesses -- to the outsourcing vendor.

The pilot project is intended to show two things: first, "that states can work together to make something happen here, in terms of simplification of sales tax administration," and second, "that there is technology out there that can aid retailers in collecting sales tax in a multistate environment," said Diane Hardt, co-chairwoman of the Streamlined Sales Tax Project.

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IT and tax managers said that for a remote tax transaction system to work, it must address security, the transaction-processing speed and the accuracy of the tax calculation. But if those concerns can be satisfied, the potential benefits, including reduced compliance costs, will be attractive to firms, they said.

If the remote process eliminates a company's audit exposure by state tax examiners, "that is definitely a sales point" for the system, said Emilio Amalfitano, manager of tax technology at Viacom International Inc., a New York-based media giant.

The states' motive for tax simplification stems from a desire to impose collection obligations on remote merchants who aren't required by law to collect sales tax unless they have a physical presence in the customer's state. Without a simple way for businesses to comply with the states' desired tax rule changes, Congress is unlikely to approve broader tax collection obligations, said state officials.

The largest company participating in the initial pilot program is O.C. Tanner Co., a privately held firm in Salt Lake City that makes employee-recognition awards and will create the medals for the 2002 Winter Olympic Games. The company is running the pilot only on an e-commerce server used for the sale of Olympics-related merchandise.

O.C. Tanner is already obligated to collect taxes in all 45 states that have a sales tax. The company said it's working on the pilot program with the goal of reducing administrative overhead in tax processing. For instance, four employees spend one week each month preparing state sales tax returns, said Jake Garn, the firm's tax manager.

Brad Lemke, the lead developer in the company's e-commerce section, was working last week on resolving remaining issues with the test server. A key problem is speed; sales tax transaction time is taking about 1.5 seconds. "A second or less would be great," he said.

If the remote server is unavailable, the system is designed to switch to Taxware software running locally. Unresolved in the pilot agreement is who will maintain the local tax software, which requires ongoing updates.

Only four states -- Kansas, Wisconsin, North Carolina and Michigan -- are participating in the pilot so far, but a total of 39 states are involved in the Streamlined Sales Tax Project.

Although the sales tax project is focused on retail, the planned revisions in tax code definitions have implications for many businesses, particularly in terms of which digital products are subject to taxes and which rules are applied to services, said William Luethge, director of property and sales taxes at Delphi Automotive Systems Corp. in Dayton, Ohio. "It's going to have some collateral effects," he said.