Streamlined Sales Tax Mitigation

1. Streamlined Sales Tax Mitigation Proposed Scope & Objectives Joint Legislative Audit & Review Committee September 22, 2010 Peter Heineccius, JLARC Staff

2. Statute Mandates Study RCW 44.28.815 directs JLARC to review the mitigation provisions enacted when Washington became a full member of the Streamlined Sales and Use Tax Agreement (“SSUTA”) Streamlined Sales Tax Mitigation

3. What is the Streamlined Sales and Use Tax Agreement? $ $ States cannot compel out-of-state retailers to collect sales tax SSUTA registered retailers will collect and remit sales tax to member states Streamlined Sales Tax Mitigation • Multistate compact to simplify state tax codes • Facilitates collecting taxes on interstate sales

4. What is the Streamlined Sales and Use Tax Agreement? Full Member Associate Member • Currently 20 full member states • WA became a full member on July 1, 2008 • Members must have uniform sourcing rules Streamlined Sales Tax Mitigation

5. Sourcing Rules Determine the Taxable Location of a Sale $ $ Kent Seattle Old rule: Origin Sourcing New rule: Destination Sourcing Kent Seattle Kent Seattle Kent received local sales tax Seattle receives local sales tax Streamlined Sales Tax Mitigation • Location determines the sales tax rate and which jurisdictions receive local sales tax • Washington changed to destination sourcing to become a full member of the Streamlined Sales and Use Tax Agreement

6. Change to Sourcing Rules Impacted 364 Local Taxing Jurisdictions Counties (39) Cities (281) Transit Areas (27) Other (17) Streamlined Sales Tax Mitigation

7. Change to Sourcing Rules Shifted Distribution of Local Sales Tax Kent Seattle Kent Seattle $ $ $ $ $ $ $ $ Origin Sourcing (Pre-2008): $3 $1 Destination Sourcing (Post-2008): $1 $3 Gain/Loss From Sourcing Change: -$2+$2 Streamlined Sales Tax Mitigation Some jurisdictions saw a gain in local sales tax revenue, but others experienced a loss

8. DOR Determines the Net Loss of Each Jurisdiction Each Quarter Kent $ Gain/Loss From Sourcing Change: -$2 Voluntary Compliance Revenue: +$1 Gain/Loss From Sourcing Change: Net Loss: -$2 -$1 Streamlined Sales Tax Mitigation DOR estimates the impact from the sourcing change, less any new out-of-state revenue

9. State Treasurer Compensates Each Jurisdiction For Quarterly Net Loss Streamlined Sales Tax Mitigation • Mitigation for net losses comes from an account in the General Fund-State • Annual cost to the state for all mitigation payments is approximately $25 million • Mitigation payments end when a jurisdiction’s voluntary compliance revenue completely offsets its loss • 65 jurisdictions currently receive mitigation • Eighth quarterly payment scheduled for September 30, 2010

10. Study Objectives • Does DOR determine local losses consistent with statutory provisions? • Do the distributions made to local jurisdictions equal the net loss as determined by DOR? • To what extent do the distributions compensate local jurisdictions for the impact of the sourcing change? • How have other Streamline Agreement member states addressed impacts to local jurisdictions due to sourcing changes? Streamlined Sales Tax Mitigation

11. Next Steps Study Timeline: • Preliminary Report: December 2010 • Proposed Final Report: January 2011 Staff Contact Information: Peter Heineccius 360-786-5123 Heineccius.Peter@leg.wa.gov www.jlarc.leg.wa.gov Streamlined Sales Tax Mitigation