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The Association for Interactive Media
and
The Advisory Commission on Electronic
Commerce
The Advisory Commission on Electronic Commerce Online
commerce raises many complicated questions. Therefore,
Congress created the Advisory Commission on Electronic Commerce as
part of the Internet Tax Freedom Act passed last session of
Congress. The Commission has been asked to study all the
issues raised by the growth of e-commerce, both domestic and
international, and report back to Congress with recommended
solutions. The Commission must recommend to Congress policies
that will create a tax regime that will be fair and allow the
Internet to continue growing as an engine of economic prosperity.
The 19 Member Blue Ribbon Commission includes the Secretaries of
Treasury and Commerce, the U.S. Trade Representative, eight leaders
from Internet or telecommunications businesses and consumer groups,
and eight representatives of State and local governments. On
the business side, six major corporations and one prominent taxpayer
advocate were appointed to the panel. In addition, the
Association for Interactive Media is the only trade association that
secured a spot on the prestigious Commission. AIM is
consequently strongly positioned to be a major player in the issue
of Internet taxation -- one of the most important policy debates
confronting the future of the Internet and electronic
commerce. The 19 Commissioners are as follows:
Lawrence H. Summers (replaced Robert Rubin)- Secretary of
Treasury Ron Kirk - Mayor, Dallas Background on Internet Taxes and the Internet Tax Freedom Act The
Internet Tax Freedom Act (ITFA) passed by Congress last October
places a three-year moratorium on new and discriminatory or multiple
state and local taxes on Internet activity. The moratorium
applies to levies that uniquely tax the Internet or Internet
commerce, or result in more than one layer of taxation.
Because such taxes were being imposed, Congress wisely preempted
activity in this area in order to allow the Internet and electronic
commerce time to develop unfettered.
The ITFA was originally introduced in Congress by Congressman
Chris Cox (R-CA) and Senator Ron Wyden (D-OR). The initial
bill did not create a formal Commission to study the implications of
taxation on e-commerce. The Commission concept grew out of
negotiations between Rep. Cox and the National Governor's
Association, led by Governor Michael Leavitt (R-UT), which help
secure passage of the bill in the House. The Senate retained
the Commission concept, but modified the Cox-Leavitt Commission
considerably. Ultimately, the Senate bill was attached to an
Omnibus Approprations bill at the close of the 1998 Congressional
session, and became law on October 21, 1998.
A common misconception about the ITFA is that it affected the
taxability of standard sales transactions or made the Internet a
"tax free zone." In truth, the ITFA only placed a 3 year moratorium
on discriminatory or multiple taxes. Provided consumers
live in a state that taxes sales, they likely owe a sales or use tax
on online purchases.
Consumers owe sales taxes on goods bought from same-state
vendors, whether purchased at a store or online. Use taxes are
sales taxes' twin, and are levied against goods purchased from
out-of-state vendors but used in-state. Most people understandably
do not believe they owe taxes on out-of-state Internet purchases –
or catalog or mail order sales, for that matter -- as states have
not vigorously enforced use tax obligations except on large ticket
items. State and local officials would rather force
out-of-state businesses (who have no political recourse if treated
badly) to do their collecting, rather than directly raise the matter
with their own citizens (who may respond angrily in the voting
booth).
The reason states cannot force out-of-state sellers to collect
use taxes is the Constitution. The Commerce Clause prevents
one state from taxing another state's citizens, unless it has some
claim to jurisdiction over them. The Supreme Court has ruled,
both in 1967 and again in 1992, that unless a business has a
sufficient connection or "nexus" to a state, that state cannot
impose use tax collection obligations upon it. These rulings
were grounded in the limits of state power, focusing on the burdens
that would confront businesses if every state and locality obtained
national taxing authority. Because about 30,000 tax
jurisdictions and 6,000 different sales/use tax rates exist in the
U.S., and over 600 rate changes occur each year, these burdens are
potentially debilitating, particularly when enforcement (audits) is
also considered.
Nonetheless, having Congress legislate around these Court rulings
has been a major goal of most state and local groups since 1967, but
by overwhelming margins Congress has always refused.
State/local groups argue that out-of-state vendors have an unfair
tax advantage over "Main Street" local retailers. Yet, they do
not suggest that true fairness be imposed – namely, that local
merchants also determine each consumer's residency and collect taxes
for up to 30,000 different taxing jurisdictions. These issues
will surely be discussed again before the Commission. The Commission's Schedule The
Internet Tax Freedom Act imposed a three-year tax moratorium, which
runs through October 2001, and gave the Commission 18 months to
accomplish its objectives, until April 2000. Accordingly,
Congress wanted time to consider the Commission's work product as it
deliberated on whether to extend the tax moratorium or allow it to
lapse.
The Commissioners have informally selected Governor James Gilmore
of Virginia as the Commission's Chairman. He will be formally
elected at the Commission's first meeting, which will occur on June
21-22, 1999, in Williamsburg, Virginia. Governor Gilmore has
scheduled at least two other Commission meetings – one in December
1999 around Silicon Valley, and the second in March 2000 in Austin,
Texas. The Commission's Duties Congress
gave the Commission an extremely broad mandate to "conduct a
thorough study of Federal, State and local, and international
taxation and tariff treatment of transactions using the Internet and
Internet access and other comparable intrastate, interstate or
international sales activities." Congress also asked the Commission
to focus its attention on several more specific Internet-related
topics discussed below.
International Issues – The Commission must examine: (1)
foreign trade barriers imposed on electronic commerce and
telecommunication services, and how such barriers affect US
consumers, US competitiveness and the growth of the Internet; and
(2) the collection and administration of consumption taxes on
electronic commerce in other countries and the US, and the impact of
such collection on the global economy.
Telecommunications Tax Simplification – The Commission was
asked to examine ways to simplify Federal and State and local taxes
imposed on the provision of telecommunication service. Voice,
video and data transmission all now occurs via digital technology,
and the 1996 Telecommunications Act began the process of eliminating
federal regulatory distinctions. States and localities tax
telephone, cable, satellite and even power companies much
differently because of their historic origins as regulated
monopolies, yet these companies now aggressively compete in the
Internet arena. The Commission will discuss whether separate
tax regimes for direct competitors is appropriate.
State and Local Uniformity – The Commission was also tasked with
proposing model state legislation to provide uniform definitions for
sales and use tax purposes, that would ensure Internet commerce is
treated in a tax and technologically neutral manner. The
definitional inconsistencies among states and localities for tax and
regulatory purposes constitute one of the principal administrative
complexities of doing business on the Internet.
Effects of Cybertaxation – The Commission was asked to study the
effects of cybertaxation, or the lack of taxation, on retail
businesses and State and local governments. This study must
include a review of the efforts of State and local governments to
collect sales and use taxes on purchases from remote sellers.
The Federal Communications Excise Tax – Finally, the Commission
must examine the impact of the Internet and Internet access,
particularly voice transmission, on the revenue base for the federal
telecommunications excise tax. Some fear that unless its base
is broadened to include Internet-based transmissions as well, the
tax revenue generated will begin to evaporate. The Outlook for the Commission Process As the
Commission begins its deliberations, the outcome of the Commission
process is difficult to predict. Still, several proposals are
already on the table.
One Commissioner, Grover Norquist of Americans for Tax Reform,
has already called for the repeal of the federal communications
excise tax.
The Commissioners from telecommunications companies can be
expected to focus on the simplification of state and local taxation
of the telecommunications industry. The multinational
companies on the Commission will push the Commission toward
consideration of the international ramifications, an area of
discussion that is still largely unexplored.
However, the major battleground of the Commission process is
shaping up to be the same battle that occurred in Congress during
debate over the Internet Tax Freedom Act – namely, whether
out-of-state marketers should be required to collect use taxes for
states in which they have no "nexus" or physical presence.
State and local officials, led by Governor Leavitt who is a member
of the Commission, can be expected to advance a simplified use tax
collection process. This proposal, which was the impetus for
the compromise agreement with Congressman Cox, would reverse Quill
protections and allow states to impose use tax collection
obligations on out-of-state sellers. In return for gaining
this authority, states would initiate a "one-rate-per-state" tax
program, to reduce the number of compliance obligations to the
number of states with sales taxes (currently 46, as opposed to 7000
existing state and local sales taxes and 30,000
jurisdictions). The proposal also calls for simplified
collection and enforcement procedures. Other Commissioners can
be expected to oppose this program as a significant tax increase on
the American people, and as still too much of an unfair burden on
Internet and other out-of-state sellers.
Another proposal to be discussed will surely involve whether to
extend the three-year moratorium of the Internet Tax Freedom
Act. Currently, a bill introduced in the Congress by Senator
Robert Smith (R-NH) would extend the Internet tax moratorium
indefinitely.
Overall, the fault line of debate will be between Internet
proponents who want to focus on how state and local tax activity
hinders electronic commerce, and state and local officials that want
to focus on how the growth of electronic commerce threatens their
revenue bases. This tension holds no easy answers.
Hopefully, the Commission process will be a success, and will result
in some sound recommendations based on widespread consensus and
thoughtful consideration of complex issues. The Commission
will also hopefully work to preserve the Internet as a great engine
of economic prosperity, and not with the intent of creating a gold
mine for tax collectors.
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(c) 1999-2000 Association for Interactive Media 888/337-0008 www.interactivehq.org |
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