Tax Coordination

As regional economies have become more interconnected, the administration of tax revenue systems has become increasingly complex, and coordination among taxing jurisdictions through compacts and other agreements has become a more frequent means to improve tax administration and enforcement. Compacts and other agreements among governments are established through statute and carry the force and effect of law. A tax-coordination agreement permits the participating governments to engage in specified collection or enforcement activities associated with a tax.

While tax coordination can occur among governments at any level, the most prominent tax coordination efforts are the states’ efforts to address sales tax collection problems. Sales and use taxes generate nearly 50 percent of the aggregate revenues for state governments, and governors and public officials are concerned that sales and use tax revenues are being eroded through the increase of remote sales.

Remote sales, facilitated through mail-order companies and the Internet, are transactions that occur between residents and vendors outside of the state. Remote sales are generally taxed through a “use” tax, which is similar to the sales tax. States generally require vendors to collect the sales tax from consumers at the time of sale because using vendors to collect the sales tax improves tax compliance. However, it is difficult for states to audit and enforce the tax on items purchased through remote sales because the state has no authority to require the vendor in another state to collect and remit the use tax, unless the vendor has a significant physical presence in the state (the legal term for this presence is “nexus”). These issues prove difficult for a single state to successfully mitigate alone. Forty-two states, in response, have entered into a tax coordination agreement called the Streamlined Sales Tax Project to collectively deal with the tax enforcement and compliance problems posed by remote sales.

Interstate compacts and agreements are permissible under Article I, Section 10, Clause 3, of the U.S. Constitution. In some cases, interstate agreements are motivated by the threat of federal intervention. For example, in the early 1990’s the trucking interest groups pressured the national government to address problems in state fuel tax administration. With the risk of federal intervention, all 50 states eventually adopted the international fuel tax agreement (IFTA). The provinces of Canada have also joined IFTA, suggesting that tax coordination may become even more commonplace as economies become increasingly global.

SEE ALSO: Council of State Governments; Governors and Federalism; Interstate Compacts; Interstate Relations; Public Administration