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Federal Document Clearing House
Congressional Testimony
May 17, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 10134 words
HEADLINE:
TESTIMONY May 17, 2000 GENE N. LEBRUN MEMBER, HOUSE JUDICIARY
COMMERCIAL AND ADMINISTRATIVE LAW INTERNET TAX ISSUES
BODY:
May 17, 2000 Statement of Gene N. Lebrun
Member, Advisory Commission on Electronic Commerce On H.R. 4267 Internet
Tax Reform and Reduction Act of 2000 Before the Subcommittee on
Commercial and Administrative Law Committee on the Judiciary U.S. House of
Representatives A Proposal for a Streamlined, Fair Tax System
Introduction The advent of the Internet and electronic commerce is
revolutionizing American society. It is altering the way individuals communicate
and manage their personal affairs; it is changing the way government interacts
and provides services to its citizens. Above all, it is radically reforming the
way business operates, particularly with respect to the sale of goods and
services to other businesses and to the consuming public. The U.S. fiscal system
- federal, state and local - must likewise undergo a radical reformation if it
is to work in concert with the new economy. Governments must provide a fiscal
climate that allows electronic commerce to fully mature and reach its untold
potential. Tax systems must be modernized so that revenues are
available to meet the legitimate expectations of citizens for desired services.
All this must be done in a manner that is as neutral as possible across all
forms of commerce and that avoids putting the government in the role of choosing
winners and losers in the new economy. As elected leaders of state, county, and
city government, we also have a fundamental bottom line that drives our decision
making - providing effective and efficient public services. As members of the
Advisory Commission in Electronic Commerce, we have focused on protecting our
bottom line in this new economy as well as recognizing the need for change in
our state and local revenue systems. While we are ready and willing to take the
steps necessary to ensure that our revenue collection systems reflect this
increasingly borderless economy, we are not willing to compromise our ability to
deliver high quality services to all of our constituents. Despite the remarkable
opportunities offered by technology, there will never be a time when you can
completely digitize the delivery of public services such as public safety,
public education, and public works. The Advisory Commission on Electronic
Commerce was created to examine precisely this question: How should U.S.
tax systems be adjusted so that both electronic commerce and
government can fulfill the roles required of them in the new economy. It is
unfortunate that the Commission was unable to reach the 2/3 majority required by
the Internet Tax Freedom Act to enable it to make a
recommendation to Congress. Perhaps an appropriately balanced Commission could
have achieved such a consensus. Nonetheless, much was learned from the
Commission process, and each member can take away a great deal from the process
that will inform his/her decisions as we move into the 21st century. From the
work of the Commission, we have discerned a number of principles that we believe
enjoy reasonably widespread support among members of the Commission as well as
the taxpaying public. We have used those principles to guide the development of
a comprehensive proposal to address many of the issues presented to the
Commission. We offer them for consideration by Congress, the Administration,
state and local governments and others. Level Playing Field and Radical
Simplification of the Sales Tax We believe there are two
preeminent principles that all parties should take away from this process.
First, it is paramount that government officials and business leaders accord the
highest priority to creating a level playing field that will treat all sellers -
regardless of the channels through which they choose to market - as fairly and
uniformly as possible for sales and use tax purposes. Second,
the cornerstone of that level playing field should be a radically streamlined
state and local sales and use tax system that is characterized
by simplicity, uniformity, neutrality, efficiency and fairness. Unless we are
able to achieve these objectives, we will have sanctioned a system in which
certain retailers face an insurmountable competitive disadvantage simply because
of how they operate. We will also have implicitly made a choice that the sales
and use tax is a relic of a bygone era and not capable of
operating in the digital, electronic world of the 21st century. We do not
believe that Main Street retailers should be put at such a disadvantage; neither
do we believe it is necessary or desirable to abandon the sales
tax. Electronic commerce makes it a certainty that many
traditional businesses will compete on an uneven playing field against on line
retailers. Under current Supreme Court holdings, states may not require a seller
that does not have a physical presence in a state to collect
tax on goods and services sent into that state. Use
tax is still owed on the purchase, but the individual consumer
is responsible for remitting the tax directly to the taxing
authority. The Court has clearly held that it is within the authority of
Congress to authorize states to require remote sellers to collect
tax on sales into a state and that its standard can change if
the states reduce the burden of collection on remote sellers. Without a change
in current law, however, state use tax is unlikely to be
collected on a substantial portion of electronic commerce transactions;
estimates are that the potential revenue loss could reach $20 billion annually
by 2003. This differentiation between remote and other sales might be allowed to
continue if retailing remained divided between companies that are primarily on
line sellers and others that are basically bricks and mortar sellers. We have
learned in the Commission, however, that the on line and the physical worlds are
rapidly integrating their operations to meet the demands of the consumers.
Bricks and mortar retailers will pour millions into their on line shopping
offerings as they morph into clicks and mortar retailers. Likewise, on line
sellers are trying to establish relationships with traditional storefronts to
offer better customer services. In this integrated world, if remote sales are
taxed differently than over-the-counter sales, we will have a system based upon
a tangle of legal maneuvering to create fictitious separations between local
merchants and their Internet counterparts and a playing field that will be
viewed as inherently unfair. Such unfairness, if left to fester, will bring
contempt and noncompliance that will, in turn, undermine the ability of state
and local governments to provide required state and local services. The
conceptual solution to the state taxation issue is the creation of a level
playing field in which all retailers are treated in an essentially similar
manner with respect to requirements for collecting state sales and use
tax. We recognize, however, that compliance and administration
of the current sales and use tax system is complex and
burdensome, particularly for multistate retailers. Accordingly, the linchpin of
the proposals we offer below is that state and local governments must pursue an
aggressive program to make the sales and use tax and its
administration simpler and more uniform across states. If a level playing field
is to be achieved, states and localities must act to make the sales
tax more understandable and consistent across states. They must
also act to reduce substantially the administrative complexity and burden
imposed on all types of sellers. Other Principles Several other principles have
helped guide our proposals: - We do not see the Internet as a target for new
taxes. Neither do we believe there exists any compelling reason
to impose taxes exclusively targeted at the Internet as a
medium or electronic commerce as a distinct channel of commerce. Discriminatory
taxes on electronic commerce will not create an environment
that is conducive to economic growth and will simply increase the digital
divide, i.e., reduce the availability and affordability of the Internet to those
Americans at the bottom of our socioeconomic ladder. - The service demands
placed on state and local governments will not dissipate in the near future.
Despite the move to a virtual world, there is still a demand for real-world
services of police and fire protection, quality education, environmental
resource management and the like. State and local tax systems
must be adapted to deal effectively with the new economy if states and
localities are to meet the legitimate expectations of the voters for quality
services. - One of the most important and enduring features of the United States
is the ability of taxpayers at each level of government to determine which
taxes, fees, or levies they will or will not use to finance
public safety, education, and public infrastructure. There is no reason to stand
federalism on its head, much less to eviscerate this essential component of our
history and tradition. There has been no showing of a need for restrictions on
state and local taxation of electronic commerce, and such intervention would
inevitably lead to unintended consequences and government involvement in
choosing winners and losers. At the same time, states and localities must be
prepared to take the initiative in simplifying their tax
systems and adapting them to operate in the new economy. - The federal, state
and local system of taxing telecommunications is to a
considerable extent a relic of a more regulated communications era. In an
unregulated environment, complying with the telecommunications
tax structure has become overly burdensome, and some of the
taxes have discriminatory aspects to them. Substantial action
must be taken in cooperation with the telecommunications
industry to simplify and rationalize this tax structure. - The
work of the Commission highlighted the enormous sensitivity concerning privacy
rights on the Internet. Individuals harbor fears that personal information given
on line might have unfortunate, and unintended, uses that could impinge upon
their private lives. While taxation policy itself might not be able to have any
great detrimental effect on the tidal wave of growth in electronic commerce,
tax policy that compromises individual privacy rights is
unacceptable. Every care must be taken in designing tax systems
for electronic commerce that there will be no compromising of consumer privacy.
With these principles in mind, we have fashioned proposals that address the
primary state and local tax issues brought before us. We
believe that, if adopted, they would establish an environment that continues to
foster innovation and technological advancement in the development of the
Internet and electronic commerce. At the same time, they recognize the
obligation of the state and local governments to continue providing needed
services to its citizenry. They are consistent with our beliefs that Governments
should keep the tax and administrative burden on consumers and
businesses as low as possible. They are also consistent with our view that
federal policies in this area should be respectful of the sovereignty of
sub-federal jurisdictions and interstate commerce. We believe they accomplish a
balance between the needs of the Internet economy and the responsibilities of
state and local governments. The Components of a Streamlined, Fair
Tax System No Discriminatory or New Internet
Taxes The ultimate purpose of the Internet Tax
Freedom Act, which remains effective until October 2001, is to prevent targeted
taxation of the Internet and electronic commerce. We believe that is a worthy
goal, and we do not advocate discriminatory taxation of electronic commerce.
Proposal - The temporary moratorium on transaction taxes on
Internet access charges established in the Internet Tax Freedom
Act (ITFA) should be extended. - The temporary moratorium barring multiple and
discriminatory taxes on electronic commerce should be extended
for a period of time commensurate with the implementation of the sales
tax simplification efforts outlined below. Congress should then
examine whether these provisions of the ITFA should be continued. - This
extension of the ITFA should be accompanied by an examination to ensure that it
is consistent with technological and other advances since its passage and does
not create unintended consequences. In particular, the issues of appropriate
treatment for bundled communications services and Internet telephony should be
examined. Level Playing Field and Radical Sales Tax
Simplification We believe that the creation of a level playing field that will
treat all sellers - regardless of the channels through which they choose to
market - as fairly and uniformly as possible for sales and use
tax purposes is a matter of the highest priority. The
cornerstone of that level playing field must be a radically streamlined state
and local sales and use tax system that is characterized by
simplicity, uniformity, neutrality, efficiency and fairness. We further believe
that states adopting the simplified system should be granted the authority to
require remote sellers whose sales volume exceeds a specified threshold to
collect sales and use tax on goods and services sold into a
state. Consumer choices should not be distorted by disproportionate
tax collection responsibilities. This proposal is intended to
enable all consumers, whether they make purchases on the Internet or elsewhere,
to enjoy the benefits of a newly restructured sales and use tax
system. Our system of federalism mandates that the burden and the right to
simplify the sales tax system fall on the states. This proposal
gives the states until December 31, 2003 to simplify their state and local sales
tax systems in a manner that will substantially reduce the
administrative and compliance burden associated with collecting state and local
sales and use taxes. This system should not be materially 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. Proposal We recommend
that states and localities work with the National Conference of Commissioners on
Uniform State Laws (NCCUSL) to develop a streamlined sales and use
tax system as delineated below. If such a system is adopted by
the states, it will not, in our estimation, create an undue burden on interstate
commerce or burden the growth of electronic commerce and related technologies in
any material way. The features that a streamlined sales and use
tax system should address include, but are not limited to: -
Centralized, one-stop registration system - Uniform tax base
definitions - Uniform and simple sourcing rules - Uniform exemption
administration rules (including a database of all exempt entities and removal of
good faith acceptance rule) - Appropriate protection of consumer privacy -
Methodology for certifying software used in the sale tax
administration process for tax rate and taxability
determinations - Uniform bad debt rules - Uniform tax returns
and remittance forms - Consistent electronic filing and remittance methods -
State administration of all state and local use taxes on remote
sales with distribution of revenues to local governments according to precedent
and applicable state law - Uniform audit procedures - Reasonable compensation
for remote sellers that reflects the complexity of an individual state s
tax structure, including the structure of its local
taxes - Appropriate sales volume threshold below which small
business remote sellers would not be required to collect use
tax except in states in which they have a physical presence To
implement this streamlined sales tax system, we recommend that
Congress enact legislation authorizing states to develop and enter into an
Interstate Sales and Use Tax Compact by December 31, 2003. The
legislation should provide that states joining the Compact will be required to
adopt a simplified sales tax system addressing the criteria
outlined above. States adopting the simplified system would be authorized to
require remote sellers above the sales volume threshold to collect use
tax on all taxable sales into a state. The legislation should
also authorize a single use tax collection rate per state for
remote sales with the revenues therefrom to be allocated proportionately among
local governments. This authorization should offer states the option of
employing a blended rate reflecting the weighted average of state and local
rates across the state. This proposal allows states that have adopted such a
system to begin collecting use taxes on remote sales by January
1, 2004 or by the date of adoption of the compact, whichever is earlier. For
those states that do not choose to simplify their tax
collection system, current law will apply. In future years, states that had
either chosen not to simplify, or failed to meet the required criteria by
December 31, 2003, can opt into the system, commencing with any succeeding
calendar year, by meeting the simplification standards set forth. Nexus
Standstill Constitutional considerations of due process prevent a state from
imposing tax obligations on a person or entity unless that
person or entity has a connection with the state that would be sufficient to
justify that state s exercise of jurisdiction over the person or entity. This is
the concept of nexus. The Commission has considered several proposals to
establish supposed bright lines for determining what constitutes nexus in the
state tax world. We believe such efforts are misguided for two
reasons. First, the proposals considered by the Commission try to define nexus
in terms that are focused on physical presence in a state, when all observers
recognize that the world of electronic commerce is increasingly borderless,
digital and intangible. This seems entirely incongruous. Second, the
establishment of new, purported bright line nexus rules, no matter how well
meaning, will simply result in more litigation and legal contortions as entities
attempt to restructure themselves to take advantage of the tax
advantages. Many of the historic concerns of taxpayers over nexus for sales and
use tax purposes will disappear, as irrelevant, after enactment
of the simplified sales tax system contained in this proposal.
Defining tax collection obligations on the basis of sales
volume in a simplified system is the only standard that makes sense. In the
meantime, however, states do have an obligation to make the standards they
employ in determining nexus as clear as possible to taxpayers. Proposal -
Congress should take no action to establish in federal law any standards that
should be applied in determining nexus for state sales and use
taxes or business activity taxes. Each state,
however, should examine its current policies and practices to determine if there
are areas where additional taxpayer guidance is necessary. States should also
ensure that they have a procedure a taxpayer may utilize to obtain a response to
questions regarding nexus and a ruling on whether a specified set of activities
constitutes nexus. - The legislation authorizing the Interstate Sales and Use
Tax Compact should make clear that any obligation for use
tax collection imposed on a remote seller, as a result of this
proposal, shall not be considered as a factor in determining nexus in a state
for any other tax purpose. - States should make clear that
voluntarily registering and collecting a state s use tax is not
a factor in considering nexus for any other state tax purpose.
Simplify and Reduce Telecommunications Tax Burdens The
telecommunications industry is subject to several levels of
complicated taxes that put an onerous and costly compliance
burden on that industry. These costs ultimately are borne by the American
consumer, thus increasing the difficulty lower-income households have in
enjoying the fruits of the information highway. The oldest of these
taxes - the federal excise tax on
telecommunications - was a telegraph tax
enacted to pay for the Spanish American war. Any inequitable taxation and
compliance burden on the telecommunications industry is an
impediment to universal access to the emerging digital world. The
telecommunications tax system should be reformed to reduce the
overall tax burden on consumers and simplified so consumers can
have lower access costs to the nation s information highway. State and local
governments, at the behest of the telecommunications industry,
have already begun the process of formulating a strategy for achieving these
goals. Proposal - Phase-out of the 3-percent federal excise tax
on communications services is a worthy policy objective that should be
considered. It must be weighed against other proposed tax
reductions and must not be allowed to threaten the important priorities of
maintaining fiscal discipline, paying down the national debt, extending the
solvency of Medicare and Social Security, and maintaining core government
functions such as health care and education. - State and local governments
should continue to work cooperatively with the
telecommunications industry and other relevant groups to
dramatically reduce the complexity and cost of complying with state and local
telecommunications taxes, and to create more uniform
telecommunication state tax laws. This is not
an issue of the amount of tax, but of the onerous nature of the
current compliance mechanisms. Consistent with the proposal submitted to the
Commission by the representatives of the telecommunications
industry, the simplification should consider the adoption of common definitions
and sourcing rules. - State and local governments are encouraged to address
taxes that appear to be discriminatory toward the
telecommunications industry, largely because they were enacted
during an era when telecommunications services were provided by
a price-regulated monopoly. Such taxes are no longer
appropriate in a deregulated environment. Revenue Neutrality The Advisory
Commission on Electronic Commerce was not established to increase the revenues
available to states and localities. No Commissioner wants the recommendations to
be an excuse for increasing the tax burden on citizens or
increasing the size of government. At the same time, state and local elected
officials should be trusted to make choices between expending available
tax revenues on services desired by the citizens and reductions
in the overall tax burden. That is, after all, one of the
primary jobs they were given when the voters elected them. Likewise, it should
be the voters of the state or local jurisdiction that determine whether they
have exercised appropriate stewardship over the revenues entrusted to them. To
assist in this effort, citizens will require information on which to base their
decisions. Proposal We recommend that states adopt a process to provide
information, sunshine and accountability to the citizenry in determining the
impact of these proposals on state revenues and tax burdens.
Citizens should be provided information on the effects of these recommendations
and the use of any additional revenues they may produce. They can then evaluate
the propriety of the actions of their elected officials. We believe this to be a
very significant part of our proposal. We believe it is important to create a
fair and level playing field and to protect the states from the potential of
future tax revenue losses, but we are not in favor of any
tax increase arising from our proposals. Digital Products and
Services The taxation of on line digital goods and services and on line digital
supply of data and information services is a complex matter. Several states
under current law have in place statutes, predating the Internet
Tax Freedom Act, taxing on line services or data and
information. Additionally, several states have interpreted their statutes as
they existed prior to ITFA to impose use taxes on digital goods
and services that are transmitted by the seller and consumed by the buyer on
line without ever being converted into tangible personal property. If not
handled properly, attempts to determine some reasonable site of use or
consumption of purely digital goods either invites an unacceptable invasion of a
buyer's privacy or an unacceptable level of complexity or both. We believe that
these issues can be resolved by the states. Proposal We propose that prior to
December 31, 2003 the states develop a uniform, simple, non-burdensome system to
tax these on line digital products without violating individual
privacy or creating a compliance burden. Further Study on Items Outside the
Commission's Scope The Commission's efforts focused attention on several areas
beyond its scope and ken. We believe that Congress should request additional
empirical research on: - The Digital Divide. We believe that it is clearly in
the best interest of all Americans to eliminate the digital divide
expeditiously. Congress should address the causes and potential solutions of
this growing problem with the sense of urgency that it deserves. This work
should therefore be done with one eye on the problem, and the other eye focused
continually on the steps that can be taken NOW to bring all Americans into the
mainstream of the emerging digital economy. We believe that no other item in
this proposal addresses a problem as important to the country as does the
elimination of the digital divide. - Impact of E-commerce. Because of the speed
of the beneficial changes in the economy brought about by e-commerce there was a
very wide range of views presented to us by responsible parties on the likely
future impacts of e-commerce on state and local revenues. We believe that
Congress should establish an ongoing review measuring and projecting the impacts
of the new digital economy on the revenues and functions of the federal, state
and local governments. The Majority Report: Permanent Special Privileges at the
Expense of the Public Interest The so-called majority report of the Advisory
Commission on Electronic Commerce would create special tax
privileges that would benefit e-commerce businesses at the expense of small
businesses, working families, homeowners and local retailers. Conservatively
estimated, the proposals in the document would cause at least a $20 billion
annual tax shift from privileged e- commerce businesses to
small businesses, working families and homeowners in the form of higher income
and property taxes. The majority proposals will also undermine
state sovereignty and reduce the capacity of state and local governments to
fulfill their vital roles in meeting the needs of their citizens and supporting
the national economy. The majority produced a document that violates the
Internet Tax Freedom Act. The document failed to receive the
necessary 2/3 majority required by law (and under the original version of the
Commission's rules) for submitting a report to Congress. The document also
violates the requirement that the recommendations of the Commission be
tax and technologically neutral. Far from being neutral, the
majority report picks winners and losers by substantially favoring a select
group of businesses and technologies over other businesses and technologies. No
amount of procedural maneuvering can overcome the hard fact that this document
is not a legitimate report under both the procedural and substantive standards
set by Congress. The business members of the Commission represented a narrow
range of high-tech companies, but Main Street retailers and small businesses
were not included within the business membership. Thus, it is not surprising
that an unbalanced membership has produced an unbalanced result. The proposals
included in the document submitted to Congress would: - Provide special new
tax breaks to each industry directly represented on the
Commission. - Impose a greater tax burden on those least able
to afford it. - To an unprecedented degree, turn over key control of state and
local property, income and sales taxes to the federal
government, guaranteeing higher property taxes on homeowners
and Main Street businesses and higher income taxes on working
families. On the other hand, the proposal would not: - Solve the problems
Congress asked the Commission to address, but rather introduces significant new
complexities and indefinite delays to any solutions. - Level the playing field
for businesses or consumers, but would guarantee years and years of complex
litigation, with tax lawyers and lobbyists enjoying windfall
gains. Special Tax Privileges A listing of some of the special
tax privileges proposed in the majority document illustrates
why that document is inconsistent with the direction from Congress that the
recommendations of the Commission be tax and technologically
neutral. Under the proposals Congress would mandate these tax
privileges through an unprecedented interference in state and local
tax policy. The proposals in the majority document would: -
Expand and make permanent the unfair advantage that remote sellers into a state
enjoy over local retail stores. (The so- called pathway in the proposal to
ending this inequity is weak and uncertain and would be trumped by permanent
exceptions to nexus granted under the proposal. Those exceptions to nexus cement
in place the unfair competition confronted by traditional retailers.) - Allow
high-volume sellers of high value goods-primarily durable products such as
computers, electronic equipment, jewelry and furniture-to avoid the collection
of sales and use taxes on their products even where they
maintain a physical presence through display stores, stores within stores,
internet kiosks, and contract repair services. (This circumstance will create
unfair competition for primarily local stores without the means of taking
advantage of the sophisticated business operations and technology necessary to
use the marketing loopholes created under the Commission proposal.) - Create
special sales and excise tax exemptions for all movies, music,
newspapers, magazines, digital satellite and cable TV services,
telecommunications services and other forms of entertainment
and information services, thus shifting the burden of taxation to other products
and services. - Allow a broad range of service sector industries-primarily
successful companies employing modern information technology-to shelter income
from state income and business taxation through sophisticated income shifting
made legal under the proposal. (The burden of income and business
taxes would be shifted to working families, small businesses,
and natural resource and manufacturing companies among others.) - Create the
potential for special treatment of some companies under the property
tax, with the threat of a shift of that burden to homeowners
and small businesses. These special tax privileges primarily
arise from the combined effect of (a) the proposed tax
exemptions for digital products and their conventional counterparts and (b) nine
special dispensations from state taxing authority- nexus carve outs -granted to
certain business operations and technologies. These proposals violate the
principles of tax and technological neutrality. Instead, of
encouraging the movement of the state and local tax system
toward a level playing field, the majority recommendations tip the field steeply
in favor of high-tech, e-commerce businesses. The exemption for digital products
and their conventional counterparts would create a major tax
advantage for entertainment, software, and information industries and for any
other industry that can digitize its products. It pretends to advance
tax neutrality by treating conventional movies, tapes and CD's,
magazines, newspapers, and boxed software the same as the new digital forms of
such items. However, if the advocates of this tax break were
consistent in their support of neutrality, they would support requiring sales
taxes to be collected on all items sold over the Internet and
by catalog just as those taxes are collected in local stores.
Far from being neutral, the digital tax break constitutes
special treatment for a privileged industry. Moreover, this tax
break will spawn a host of litigation over whether a product qualifies as a
digital product or its conventional counterpart. Finally, through this
tax break, Congress would intervene in determining the
tax base of state and local governments on an unprecedented
scale and would open the floodgates to other industries seeking broad state and
local tax exemptions in the future. The nine special
dispensations from state taxing authority- nexus carve outs -would confront
local businesses and traditional store retailers with an even higher level of
unfair competition from out-of-state sellers than they face under current law.
Charged by Congress with solving the problem of the absence of a level playing
field among retailers, the proposals in the majority document run away from the
solution and would make the problem worse. The nine special dispensations from
state tax authority are a laundry list of special
tax treatment for certain technologies and business operations
and directly violate the requirement that the Commission send to Congress
recommendations that are tax and technologically neutral. In
the hands of skilled tax planners and litigators, these nine
special dispensations will be used in combination with each other to ensure that
the remote sale of virtually any product and service is free of the collection
of any sales and use tax and free of the payment of any
tax on the income earned from such sales. The nine
dispensations can even be used to forgive taxes on display
stores within stores and will allow some sellers to avoid taxes
even though they are physically present in a state. Litigation over the extent
of the privileges granted under the nine dispensations will explode. State
Sovereignty and the Role of States and Localities in the National Economy The
nine dispensations from state tax authority are an affront to
state sovereignty and will undermine federalism. These dispensations restrict
the jurisdiction of states to tax by linking state authority to
outmoded concepts of physical presence. These concepts are out-of-date because
it is possible for companies to make enormous sales, earn large quantities of
income and benefit from the services of state and local governments through
contacts other than traditional stores or offices. State and local governments
provide services that benefit the national economy as well as local residents.
State and local governments need to be able to ask those who benefit from these
services to share in their costs. Indeed, the U.S. Supreme Court has recognized
that states have the right to tax a fair share of interstate
commerce. That right will have no practical meaning if the concept of nexus
continues to be tied to outmoded notions of physical presence. Nexus in the
modern economy needs to be updated to reflect measures of economy activity.
Those who argue that the national economy-as represented by multistate and
multinational enterprises-do not benefit from state and local services ignore
some fundamental facts about the role of state and local government in our
society. Where would e-commerce and the entire information economy be today if
state and local governments did not invest trillions of dollars in the last
century in elementary and secondary education and a vast network of public
colleges and universities? How would remote sellers ship products to customers
in states if state and local governments did not make huge investments in
highways and byways that enable, among other benefits, express deliveries to
their customer's doorstep? How would these remote sellers secure payment for
goods and services and earn their profits if the states did not provide a system
of laws and courts to ensure collection? How would the marvelous networks of
telecommunications be linked together and operate were it not
for access to the public rights of way established and maintained by state and
local governments and for the police and fire protection provided to these
networks? How can, in the face of these and a host of other benefits to the
national economy provided by state and local services, some industries be
granted favored exemptions from sharing in the cost of these services? The
majority document interferes with state sovereignty in an even more fundamental
way. The U.S. Supreme Court recognizes that taxation is a core element of state
sovereignty. Without the independent authority to raise revenues, states will
not be able to set independent policy. If states and localities are not able to
perform their historic functions in our system of government, citizens will
inevitably turn to Washington for answers to state and local issues. The nine
dispensations combined with the digital product tax exemption
would preempt state authority to a degree that demonstrably weakens federalism
and centralizes power in Washington. The majority document does more than ask
for special tax breaks; it asks representatives of state and
local governments to compromise permanently the sovereign authority of the state
and the autonomy of local governments. That authority ultimately belongs to the
citizens of each state and cannot and should not be bargained away to grant
special privileges to a favored few. General Approach The goal of the
Streamlined Sales Tax Administration System is to substantially
reduce or eliminate the costs and burdens of sales tax
compliance for participating sellers through a combination of: - Simplification
of sales and use tax laws and administrative practices in key
areas. - Shifting sales tax administration to a
technology-oriented business model in which primary responsibility for
calculating, collecting, reporting and/or paying the tax can be
assumed by certified tax calculation service providers. - State
assumption of responsibility for the costs of the system either by providing the
certified tax calculation service free of charge to remote
sellers or compensating the remote sellers for the use of the certified
services. Participation in the System Participation in the Streamlined System
will be voluntary for sellers. There will be no change in current legal
standards regarding the imposition of a use tax collection
obligation on interstate sellers. Participants in the system will be presumed to
have met their sales tax obligations with respect to
transactions flowing through the system in all participating states. Thus, they
will be free to engage in such business activities in those states as they
desire without incurring additional sales tax obligations.
States will also be free to choose whether they wish to participate in the
system. Simplifications Accompanying the Streamlined System Participation in the
system will require that states enact certain simplifications before they may
participate. These include: - Adoption of uniform product codes; - Uniform
sourcing rule; - Uniform procedures for the administration of certain exempt
transactions (to include changes in the good faith standard for acceptance of
exemption certificates); - Initiating the development of uniform definitions for
use in state tax laws; - Uniform deduction for bad debts; - No
or minimal sales tax returns and reporting for participating
sellers; - Central, one-stop registration system;
LOAD-DATE: May 26, 2000, Friday
