The hidden costs of SSTP on industry

Pit & Quarry, Nov, 2004 by Jeff Greene, Kirk Low

In the effort by the states to capture sales tax on Internet and catalog sales, known as the Streamlined Sales Tax Project (SSTP), a number of new definitions have been adopted by member states. The purpose behind the new definitions is to promote uniformity and to simplify the private administration of collecting public revenues.

Several states have taken the opportunity presented by these new definitions to expand their tax base, but in most cases have conveniently forgotten to mention that the new laws implementing SSTP equal increased taxes.

Under the SSTP definitions, the term sales price includes the "total consideration ... for which personal property or services are sold, leased, or rented ..." and gives the states the option of including the following as part of the price:

* Charges by the sellers for services to complete the sale.

* Delivery charges.

* Installation charges.

* Value of exempt items when bundled together with taxable goods or services.

* Credit for a trade-in.

Tennessee

Prior to adopting the SSTP definitions, Tennessee applied sales tax to separately stated charges for freight only when the risk of loss passed to the buyer at the destination. For example, Tennessee did not tax the trucking of crushed stone if the risk of loss for the stone passed to the purchaser at the quarry. Tennessee was faced with a dilemma in adopting the SSTP definitions. Under the SSTP definition of sales price, there is no leeway to allow an exemption for delivery charges depending on the risk of loss, thus Tennessee had to choose whether to exempt all delivery charges or tax all delivery charges.

After the SSTP definitions become effective in Tennessee, the cost of crushed stone will increase.

Not only will the cost of construction increase in Tennessee, but also contractors will possibly see an increase in costs not reflected in their bids. The effective date of change in Tennessee is currently July 1, 2005. The law as currently written has no provision for contractors to recover the increased tax paid on contracts let before the tax increase, but completed after the effective date for the new law. Tennessee is making changes to the portion of the law enacting the last sales tax increase, enabling contractors to recover the increased tax to assure compliance with SSTP provisions. But the SSTP implementing law does not contain an increased tax recovery provision for contractors with existing contracts.

Contractors face a dilemma bidding on projects that are let before Tennessee's changes take effect, but will be completed after the effective date. Adding tax on freight to their bids could cause the bid to go to a competitor that did not include the added cost. Not adding the tax increase could negatively affect a contractor's profit margin.

Indiana

Much like Tennessee, Indiana only taxed freight charges if the charges were either not separately stated or were FOB destination charges. (FOB destination means that the risk of loss for the property transfers at the destination of the property.) To participate in the SSTP, Indiana adopted the new definitions. Indiana focused on the new definition of "gross retail income," which provided that installation and delivery were included in gross retail income. Prior to this new definition of gross retail income, Indiana had not taxed any separately stated installation charges.

The Indiana General Assembly did not specifically exclude delivery or installation from the definition of gross retail income when it adopted the new definition into law. The legislators, however, left intact a provision in the law that provided that gross retail income was only taxable to the extent the income represented income from services--such as delivery and installation--performed prior to the transfer of the property. The Indiana Department of Revenue issued a public document interpreting the new definition to include all installation or delivery services, regardless of when the services occurred with respect to the transfer of the property.

To clear up any confusion, the General Assembly passed a law out of a special session that clarified the earlier law. The new law, effective July 1, 2004, provides that installation of property that is separately stated, and occurs after the transfer of the property, is not taxable. The law also provides that delivery services are taxable and goes on to provide that in Indiana delivery occurs prior to the transfer of the property.

Like Tennessee, Indiana chose to raise the sales or use tax cost on construction specifically. Prior to SSTP, Indiana contractors did not pay sales tax on any delivery charges for concrete, stone or structural steel. Since July 1, the freight charges on construction materials have been taxed.

Contractors are suffering a significant impact on their construction costs, which they are passing on to their customers. There were no articles in Indiana newspapers heralding this tax increase and no public debate about the wisdom of increasing the tax burden on the construction industry during an economic recovery period. Perhaps the tax increase was inadvertent. The legislators involved may not have realized the impact.