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May 16, 2000, Tuesday

SECTION: PREPARED TESTIMONY

LENGTH: 1680 words

HEADLINE: PREPARED TESTIMONY OF JEFF MCMILLEN PROFESSIONAL STAFF

BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS SUBCOMMITTEE ON OVERSIGHT

SUBJECT - INTERNET TAX ISSUES

BODY:
The Oversight Subcommittee will hold a hearing on the report to Congress by the Advisory Commission on Electronic Commerce on Tuesday, May 16, 2000, beginning at 2:00 p.m. in 1100 Longworth House Office Building. There will be a Member Caucus at 1:30 p.m. before the hearing in the Committee Library.

The focus of the hearing is to review the Advisory Commission's report to Congress and to examine the effects of State and local, Federal, and international taxes on Internet access and on electronic commerce.

Background

Internet Tax Freedom Act

Congress passed the Internet Tax Freedom Act (ITFA), Title XI of the Omnibus Appropriations Act of 1998, P.L. 105-277, in October 1998. The ITFA imposed a three year moratorium on new taxes on Internet access1 and multiple/2 and discriminatory/3 taxes on electronic commerce. The ITFA expressed a sense of the Congress that the Internet should be free of new Federal taxes, foreign tariffs and trade barriers. The ITFA also established the Advisory Commission on Electronic Commerce to examine issues related to taxes on Internet access and electronic commerce. Advisory Commission on Electronic Commerce

The Advisory Commission was given 18 months, until April 2000, to study local, State, Federal, and international taxation of commerce conducted over the Internet, Internet access, and other related activities. The Commission was made up of three representatives from the Federal Government (the offices of Secretary of Commerce, the Secretary of the Treasury, and the U.S. Trade Representative), eight representatives of State and local governments,4 and eight representatives from affected businesses? Congress required a two- thirds majority in order for the Commission to make formal recommendations.

On April 3, 2000, the Chair of the Advisory Commission, the Honorable James S. Gilmore, III, Governor of the Commonwealth of Virginia, transmitted the Commission's final report. A majority, but not the required two-thirds super-majority, of the Commission supported the following measures:

(1) the repeal of the three percent Federal excise tax on telecommunications services;

(2) an extension of the current moratorium on multiple and discriminatory taxes on electronic commerce for an additional five years through 2006;

(3) a prohibition on the taxation of digitized goods sold over the Internet;

(4) a permanent extension of the current moratorium on the taxation of Internet access, including those taxes grandfathered by the ITFA;

(5) a "bright line" nexus standard for businesses engaged in interstate commerce;

(6) a requirement for States and localities to simplify telecommunications and use taxes;

(7) privacy protections for consumers in the administration of tax collection on electronic commerce; and

(8) a moratorium on any international tariffs on electronic transmissions over the Internet.

A two-thirds super-majority of the Commission made the following formal recommendations: (1) a clarification of State authority to spend TANF funds to provide computers and Internet access to the poor; and

(2) tax incentives to provide computers and Internet access to the poor.

H.R. 3709, "The Internet Nondiscrimination Act of 2000"

On May 3, 2000, The House Judiciary Committee passed H.R. 3709, "The Internet Nondiscrimination Act of 2000," out of committee by a vote of 29-8. The bill extends the current three year moratorium on new taxes on Internet access and multiple and discriminatory taxes on electronic commerce for an additional five years until October 21, 2006. The bill also removes the grandfather status for taxes on Internet access granted to certain States and localities in the ITFA. The House passed the legislation on May 10 by a vote of 352-75.

Collection and Remittance of Use Taxes

Notwithstanding the issues discussed above, the issue that has attracted the attention of retailers, e-tailers, consumers, and State and local governments is whether out-of-state businesses must collect and remit use taxes for sales of goods over the Internet.

The following is a brief discussion of the issue.

When a consumer walks into a retail store and purchases an object, the retailer must, in most states, collect sales tax on the purchase. The retailer then remits the sales tax to the State or locality.

When a consumer purchases an object from an out-of-state business, for example through a mail order catalogue, a use tax6 is due on the purchase in the consumer's home State. According to law established by the Supreme Court under the Commerce Clause,/7 a State cannot force the out-of-state business to collect and remit the use tax unless that business has a physical presence ("nexus") in that State - for example, a store or a warehouse. If a State cannot require the out of state business to collect and remit the use tax because the business has no presence in the State, it must rely on the consumer to remit the tax owed. Not surprisingly, few consumers remit use taxes to the states in which they live.

Purchases over the Internet often resemble purchases from mail order catalogues. A consumer in one State may call up the webpage of a business that is located out of state and purchase an object over the Internet. If the business does not have a presence in the consumer's State, then it cannot be required to collect and remit the use tax by the state in which the consumer lives. A twist on the idea is whether the otherwise out-of-state business does indeed have a presence in the consumer's State merely because the consumer can sit in his home and pull up the business' webpage. So far, no State has ruled that this creates nexus.

As seen in the examples above, the debate is not whether a tax is owed, it centers on who must collect and remit the tax. Many States, especially States that have no income tax and rely disproportionately on sales and use taxes,8 have called upon Congress to enact legislation which would, in effect, overrule Quill and permit them to require outof-state businesses to collect and remit use taxes for goods sold to consumers within the State. Many "Main Street" businesses agree with the States because they believe that Internet businesses have an advantage in that objects sold over the Internet cost less because there are no taxes (This assumes that consumers are not remitting use taxes -- a fair assumption).

Many consumers and e-commerce businesses prefer the status quo that flows from Quill. They argue that the duty to collect and remit taxes would impose a significant impediment to interstate commerce and that imposing such a duty would kill commerce conducted over the Internet before it has a chance to mature.

Some businesses have proposed that they would be willing to collect and remit use taxes that they otherwise would not be required to collect if the States agreed to drastic simplification in both rates and the definitions of goods on which taxes would be imposed.

Note that nothing in the ITFA addressed the circumstances under which States or localities could impose a duty to collect and remit use taxes on a seller of goods or services with no physical presence in such State or locality. Nothing in the ITFA addressed under which circumstances a remote seller might create sufficient presence in a State or locality to be required to collect and remit use taxes as a result of his presence on the Internet. However, the ITFA did instruct the Commission to examine these issues, but these issues were not resolved.

Purpose of May 16 Hearing

The purpose of the hearing is to review the Advisory Commission's report to Congress and to examine the effects of State and local, Federal, and international taxes on Internet access and on electronic commerce.

FOOTNOTES:

1 The legislation "grandfathered" State and local taxes on Internet access that were "generally imposed and actually enforced prior to October 1, 1998." Grandfathered taxes included taxes imposed by Colorado, Connecticut, Iowa, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Washington, D.C., and Wisconsin.

2 A consumer logs on to the Internet in Ohio and pulls up the page of an e-tailer based in Virginia whose webpage is placed on the Internet through a server in Washington, D.C. He buys a shirt. If Virginia, Ohio, and Washington, D.C. all required the collection of a non- creditable sale or use tax, this would be an example of prohibited multiple taxation on electronic commerce.

3 If a State or locality does not impose a sales tax on a book bought at a local bookstore but does impose a sales/use tax on the purchase of the same book online, this is an example of prohibited discriminatory taxation on electronic commerce.

4 Dean Andal, Chairman, California Board of Equalization; The Honorable James Gilmore, Governor, Commonwealth of Virginia; The Honorable Paul Harris, Delegate, Virginia House of Delegates; Delna Jones, County Commissioner, Washington County, Oregon; The Honorable Ron Kirk, Mayor, City of Dallas; The Honorable Gary Locke, Governor, State of Washington; The Honorable Michael Leavitt, Governor, State of Utah; and Gene Lebrun, Past President, National Conference of Commissioners on Uniform State Laws.

5 Michael Armstrong, Chairman, AT&T; Grover Norquist, President, Americans for Tax Reform; Richard Parsons, President, Time Warner; Robert Pittman, President and COO, America Online; David Pottruck, President and co-CEO, Charles Schwab and Company; John Sidgmore, Vice Chairman and COO, MCI Worldcom; Stan Sokul, Association for Interactive Media; and Theodore Waitt, Chairman, Gateway.

6 A "use tax" is equivalent to a "sales tax" for purchases of goods by a consumer from a business located in a different State than the consumer but used in the consumer's home State.

7 See National Bellas Hess v. Dept. of Revenue of Illinois, 386 U.S. 753 (1969), and Quill v. North Dakota, 504 U.S. 298 (1992).

8 The following States do not have an income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

END

LOAD-DATE: May 18, 2000

Document 48 of 142.


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