Cal-Tax e-Alerts keep members informed on key tax and public policy developments.
Greg Turner, Cal-Tax
General Counsel and Legislative Director reports in the latest
Caltaxletter about the recent meeting of the federal Advisory
Commission on Electronic Commerce. Read his article below.
The federal Advisory Commission on Electronic Commerce held its third of four scheduled meetings last week in San Francisco, taking in a long list of proposals submitted after the commission's clarion call for ideas at its New York meeting in September. However, after two days of testimony and deliberation, the commission showed no sign it will reach consensus soon on the premier topic: whether to require all remote sellers to collect and remit the use tax.
The commission was so polarized, in fact, that there appeared to be little agreement even on the nature of the problem that needs to be resolved.
Leading the charge for expanding tax collection requirements, Utah Governor Mike Leavitt and Dallas Mayor Ron Kirk described the problem as one of erosion of the sales tax base as more consumers purchase goods from out-of-state over the Internet. They said "Main Street" merchants are at competitive disadvantage by having to add the sales tax to the cost of their products.
Another coalition, led by California Board of Equalization Vice Chair Dean Andal, argued that there is no evidence to support the erosion argument. Also, they said the burden proposed to be placed on remote sellers by Governor Leavitt would work an injustice for e-commerce merchants because of the difficulty of administering use tax collection for a myriad of states. What's more, they said taxpayers should not be subject to taxation in a state in which they have no voice in the democratic process absent the establishment of a substantial physical presence. "I don't care how you tax your citizens", Mr. Andal remarked to Governor William Janklow of South Dakota, who presented the proposal of the National Governors Association (NGA), "I do care when you begin to tax businesses here in California."
Another emerging issue that all commission members appeared to be struggling with is privacy. Will a "technological solution" require the government to obtain detailed information on consumer purchasing decisions? As Fred Smith, president of the Competitive Enterprise Institute, noted, the "trusted third party" plan pushed by the NGA "presumes a level of trust we don't give to our brothers and sisters be placed in the hands of the government."
Members of the commission do, however, appear to be approaching a consensus to approve recommendations on several issues (a permanent ban on taxing Internet access charges, opposition to international tariffs on e-commerce, both of which are positions staked out by the Clinton administration, and repeal of the federal 3 percent excise tax on telecommunications originally enacted to fund the Spanish-American War). Resolutions on these issues were tabled until March when the commission holds its final scheduled meeting in Dallas. Recommendations to Congress and the White House are due in April.
Commission Chair Jim Gilmore, Republican governor of Virginia and a foe of Internet taxation, said, "I think those are places where a consensus, in fact, is developing. On the (central) question of the sales tax, there is much debate left to be done."
Additionally, members appear to understand that taxing digital goods and services appears nearly impossible because source and destination are difficult to identify and easy to manipulate.
The San Francisco meeting did mark a clear escalation in rhetoric on both sides as presenters of the more than 37 proposals submitted were subjected to stringent questioning and debate. Politics of the year 2000 election also began to surface as rumors of a pending White House endorsement of the governors' proposal to force use tax collection on all Internet transactions began circulating.
Among the most discussed proposals were:
The NGA's "Streamlined Sales Tax System for the 21st Century" is divided into two steps: the first step (2-5 years) to "create a zero burden (sales and use tax collection) system" for Internet and multi-state sellers with the ultimate goal (step 2) to "adopt a completely unified system" among the states (6-8 years). Inherent in this design is that state and local governments would bear all costs and that the system will be administered by what the proposal calls "trusted third parties." The ultimate goal of the system is to simplify, and extend to all states and all remote sellers. The proposal is also backed by the National Conference of State Legislators, the Council of State Governments, National Association of Counties, and the United States Conference of Mayors.
The NGA proposal actually asks the commission to do nothing to impede the states' abilities to collect use taxes from remote sellers. Governor Janklow pleaded with Mr. Andal not to pursue limiting forced collection because to do so would require his state to adopt an income tax to fund government services (South Dakota residents currently do not have an income tax) or to have the state police stop "the little brown trucks at the border."
A number of organizations proposed "software solutions" to the use tax collection problem, although none appeared to resolve the basic concern of taxpayers having to be knowledgeable of the intricacies of the tax law (to determine taxability for example) and be subject to audit in every jurisdiction in which they conducted a transaction.
The Committee on State Taxation (COST) submitted a proposal to increase voluntary remittance of sales and use tax. In addition to calling for radical simplification of the sales and use tax structure among the states, it suggested that to improve voluntary compliance, the states should compensate vendors for the cost of compliance. Vendor compensation was suggested by a number of panelists as a method to substantially improve voluntary compliance.
A coalition of telecommunications providers proposed simplifying the complex structure of state and local transaction taxes currently applied to telecommunications services and phasing out taxes that discriminate against the telecommunications industry.
Commissioner Andal presented two proposals. The first "A Uniform Jurisdiction Standard" would modify federal law (P.L. 86-272) to create a single nexus standard for "business activity taxes" and transaction-based taxes. The standard would codify the "substantial physical presence" standard adopted by the U.S. Supreme Court as well as add some clarification on safe harbors that have been the subject of litigation between taxpayers and the states. The second proposal - "A Prohibition on Discriminatory Ad Valorem Taxation on Interstate Telecommunications" - is what Mr. Andal calls the telecommunications equivalent of the 4-R Act which Congress adopted to prevent discriminatory taxation on rail carriers.
Republican Congressman John Kasich of Ohio submitted the "Internet Tax Elimination Act," which calls for a permanent ban on e-commerce taxation, including that of federal, state and local governments. The proposal was one of the first presented. Commission Member Gene Lebrun portended the beginning of the sometimes rancorous discussion as he abandoned the policy of the proposal in favor a more personal attack on the presenter.
The "e-Fairness Coalition," representing merchants ranging from Wal-Mart, the world's largest retailer, to Cody's Books, a Berkeley independent, held a news conference urging that all on-line purchases be taxed, just as goods are taxed when physically sold in traditional brick-and-mortar stores. David Bullington, vice president for taxation at Wal-Mart, said his company's website collects sales tax in every state, employing four people full-time to calculate state and local rates.
The commission's discussion of the draft "Issues and Policies" paper perhaps signaled the possibility there might at least be a recognition of the competing theories on the nature of the problems that need to be addressed and the predominant camps that exist on how each perceived problem should be resolved. At this point, many observers agree this alone would be a surprising success for a commission most agree was designed to fail.
- By Greg Turner, Cal-Tax general counsel and legislative director. (Editor's Note: See the Internet version of Caltaxletter (http://www.caltax.org/member/taxletter/Caltaxletter.12-20-99.asp) for a report on the December 8 state Senate Revenue and Taxation Committee's informational hearing on electronic commerce.)