This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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Calling for "meaningful state tax reform and simplification" and a permanent ban on harmful types of taxation, the ad hoc business caucus of the federal Advisory Commission on Electronic Commerce has submitted a "Proposal for Internet Tax Reform and Reduction."

The proposal's general themes, besides a simpler state sales tax system, are "substantial" across-the-board tax reduction, neutrality regardless of a buyer's choice of seller technology or location, sensitivity to low- and middle-income consumers and families, and attention to concerns over privacy. It is "intended to address the policy issues affecting electronic commerce in the context of state and local sales and use taxation and telecommunications excise taxation."

The recommendations were submitted to the rest of the commission along with a February 8 letter signed by David Pottruck, chief executive officer of Charles Schwab Corp.; C. Michael Armstrong, chair of AT&T; Richard Parsons, president of Time Warner Inc.; John W. Sidgmore, vice chair, MCI WorldCom; Robert Pittman, chief operating officer of America Online, Inc., and Theodore Waitt, chair of Gateway, Inc.

"Our goal in drafting this proposal is to address the issues brought before the commission, taking into account the views expressed by each commissioner " they said. "As the title suggests, the proposal offers the opportunity for much-needed meaningful reform to the sales and use tax and telecommunications tax systems, one that will integrate into those tax systems the emerging technologies of the 21st century in a manner that is fair, simple and neutral toward all channels for transacting commerce."

The 19-member advisory panel was created by the federal Internet Tax Freedom Act, which passed in October 1998 and established a three-year moratorium on new and discriminatory taxation of e-commerce over the Internet. The panel has met three times. Its final scheduled meeting is this month in Texas, when it is slated to make recommendations to Congress and the White House.

Among key items in the proposal:

• Use any increase in state use tax collections on remote sales to make a substantial and proportional reduction in overall state sales tax rates to maintain revenue neutrality. "We believe it is appropriate for states whose overall sales and use tax revenue collections increase as a result of use tax collections on remote sales to make a substantial and proportional reduction in their overall sales tax rates, thus maintaining revenue neutrality in overall sales and use tax collections."
  
  
• Extend the moratorium for five years on any multiple and discriminatory taxation of electronic commerce and taxation of sales of digitized goods and products, and their non-digitized counterparts.
  
  
• Permanently ban taxes on Internet access, including those that were grandfathered under the current Internet Tax Freedom Act.
  
  
• Provide additional safe harbors for establishing a physical presence or nexus for transaction taxes and business activity taxes, including income taxes. (This recommendation embodies most of the suggestions for nexus reform advocated by California Board of Equalization Chair Dean Andal, a member of the commission.)

". . . the proposal offers the opportunity for much-needed meaningful reform to the sales and use tax and telecommunications tax systems, one that will integrate into those tax systems the emerging technologies of the 21st century in a manner that is fair, simple and neutral toward all channels for transacting commerce."

• Encourage state and local governments to work through the National Conference of Commissioners on Uniform State Laws (NCCUSL) to develop a uniform sales and use tax act by October of 2004. The act would require states to follow one of two simplified tax structure models. States would be allowed either one tax rate within each state or one tax rate with one local level option tax. It also would require uniform tax base definitions and audit procedures.
  
  
• Establish a new federal advisory commission to oversee state efforts to develop uniformity in state sales and use taxation.
  
  
• Within six months of the completion of the work of NCCUSL, the new advisory commission shall transmit to Congress a report containing an evaluation of the NCCUSL effort and a recommendation on whether Congress should act to allow states to collect taxes on all remote sales.
  
  
• Eliminate the 3 percent federal excise tax on telecommunications.
  
  
• Encourage states to eliminate excess tax burden on telecommunications.
  
  
• Require states to adopt the Uniform Telecommunications State and Local Excise Tax Act or face federal actions to eliminate the discriminatory treatment of telecommunications services.
  
  
• Address concerns regarding the "digital divide" and regressive state and local transaction taxes by eliminating the disparate tax treatment of main street and Internet sales, banning taxes on Internet access and reducing overall transaction tax rates.

"This proposal, if adopted, would establish an environment that continues to foster innovation and technological advancement in the development of the Internet and electronic commerce," the report said, "while, at the same time, recognizing the role of the state and local governments to continue providing needed services to its citizenry."

The plan "is consistent with our beliefs that governments should keep the tax and administrative burden on consumers and businesses as low as possible," it said.

It gives states five years to simplify state and local sales tax systems in ways that equalize the burdens of tax collection for local and remote sellers. "In other words, we believe the system should not be more burdensome on a business that collects and remits taxes to several taxing jurisdictions than it is to a business that collects and remits taxes in a single taxing jurisdiction."