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The
e-Freedom Coalition's Proposal to the Advisory Commission on
Electronic Commerce
November 10, 1999
Electronic commerce has
grown rapidly over the past several years. The Internet is changing
the way the world does business. From the perspective of the online
consumer, it does not matter if a purchase is made from a Web site
in San Francisco, Boston, or Beijing — it only matters who offers
the best product at the best price. Everyone — including government
— gains from such increasing economic
integration.
Unfortunately, the benefits of electronic
commerce are threatened by the impulses of some elected officials to
regulate and tax. Electronic commerce is changing daily in scope and
scale: in the way the industry is structured, the ways information
is formatted and transmitted, the ways in which exchanges are
created and financed, and the ways in which privacy is protected.
Every aspect of electronic commerce is in flux. We believe any
effort to assert political control is an assault on this
emerging medium. We believe taxes on remote sales will inevitably
entail vast and invasive monitoring – Who would levy the tax;
what level of tax and of record-keeping would be imposed;
how would compliance and sales be monitored. Furthermore, tax
proposals pose severe threats to the evolving privacy protections on
the Internet such as encryption and anonymous digital money. The
emergence of these technologies could be profoundly hampered by new
tax collection schemes.
Those are reasons enough for caution.
But the problems with e-commerce taxation go far beyond its
invasiveness. Indeed, allowing state and local governments to tax
across borders is fundamentally unjust. Remote taxation is, quite
simply,Taxation without Representation on an
unprecedented scale; a practice that cannot be tolerated in
democratic society. The proper role of taxation is to support those
functions carried out within a governing jurisdiction. Such taxes
cannot be levied on or collected from people who have no say in how
the funds are used. Imposing tax collection responsibilities on
remote firms violates those important principles by staking claim on
economic activity largely unrelated to the benefits provided by the
taxing jurisdiction.
The advocates of new tax collection
schemes rely on an increasingly irrelevant distinction between
so-called "Main Street" businesses and online business. But the
Internet is open to everyone. Even as the Commission deliberates,
Main Street businesses are embracing the Internet in droves, through
individual Web sites, online auctions, and such emerging forums as
Amazon's zShops and Iconomy.com's automated storefronts. In the name
of the small number of Main Street businesses that would stifle
rather than embrace the opportunities presented by the Internet, the
proponents of new tax collection schemes are willing to sacrifice
the ability of future Main Streeters to reach the world via
the information highway. If the advocates of expanded taxation
prevail, many main Street businesses will stay precisely that –
never reaching their full potential in the increasingly global
marketplace.
Proposals to apply "efficient" or "uniform"
taxes to remote sales are especially distressing. A uniform tax is
easily raised and high tax rates, even when administered on a
neutral basis, are detrimental to economic growth and development.
Electronic commerce empowers consumers to take advantage of
competitive tax rates in other jurisdictions and thus serves as a
necessary constraint on excessive government. The flexibility in
moving capital and economic activities around the globe offered by
the Internet at last makes it possible to sharpen those disciplining
influences. For those officials concerned about "leakage" from
state and local taxes due to Internet commerce, the solution is a
re-examination of their own tax-and-spending policies. The first
priority should be to cut unnecessary expenditures and streamline
tax collection systems. Indeed, it is abundantly clear in this time
of unprecedented federal, state and local budget surpluses that the
last thing politicians need are new revenues.
Rather than
impose new and onerous tax collection schemes, we take a more open
approach that respects the sovereignty of both taxpayers and local
jurisdictions.
Recognizing that a citizen's ability to
take advantage of all the Internet offers, including e-commerce,
completely depends on the Internet's accessibility, we begin this
proposal with five recommendations to tear down and prevent the
re-emergence of government-imposed taxes and regulations that serve
only to drive up costs for consumers and retard the investments
needed to strengthen and maintain the national information
infrastructure. Specifically, we have identified five tax-related
barriers to Internet access:
r Barrier #1: The federal 3%
excise tax on telecommunications. The tax is an anachronism and
should be repealed immediately.
r Barrier #2:
Discriminatory ad valorem taxation of interstate
telecommunications. Fifteen states tax telecommunications
business property at rates higher than other property, driving up
costs for consumers. Federal protections against such taxes –
already in effect for railroads, airlines and trucking -- should be
extended to telecommunications.
r Barrier #3: Internet
tolls – new taxes and fees levied on telecommunications providers
and their customers when cable is installed along highways and
roads. These new taxes, which can run up to 5% of gross
receipts, drive up costs for consumers, and should be abolished.
Congress should make clear that the 1996 Telecommunications Act
intended only for state and local governments to be reimbursed for
actual costs incurred for managing public rights of
way.
r Barrier #4: High state and local telecommunications
taxes, complicated auditing and filing procedures. Many
governments are using consumer telephone bills as cash cows,
imposing multiple and high taxes on services. Such taxes should be
slashed to a single tax per state and locality, and filing/auditing
procedures streamlined.
r Barrier #5: Internet access
taxes. The temporary federal ban on Internet access taxes should
be made permanent. States and localities that imposed such taxes
before the ban took effect should repeal any taxes on access to keep
costs down for consumers.
Next, we propose that
if sales taxes are to continue to be collected online,
a pro-growth system for the collection of sales and use taxes by
companies with a substantial physical presence within the taxing
jurisdiction is appropriate. The system would affirm, update and
clarify existing constitutional law by setting clear jurisdictional
standards that are relevant and easily understood in "new economy."
Originally proposed by Commissioner Dean Andal, this proposal will
encourage tax collection by minimizing the compliance burden while
at the same time encourage expansion of e-commerce by improving the
certainty of state and local tax responsibilities.
In short,
our proposal hinges on many of the principles that have prevailed in
fostering the Internet's own phenomenal growth: openness, fairness,
accessibility, freedom, and the minimal involvement of political
institutions. We now propose taking the Internet into the next
century by increasing its accessibility, encouraging the growth of
e-commerce, and enabling tax collection within proper constitutional
guidelines.
A Clear, Constitutional Approach to e-Commerce
Taxation
Recommendation #1: (a) Permanently
ban taxes on Internet access. State and local governments that
imposed taxes on Internet access prior federal moratorium should
repeal those taxes, and no new taxes on access (service) should be
imposed. (b) Amend the Internet Tax Freedom Act to make
permanent the moratorium on discriminatory sales and use
taxes.
Section 1101(a)(1) of the Internet Tax Freedom Act
placed a three-year moratorium on any new Internet access service
taxes that were not in place as of October 1, 1998. "Internet access
service" is defined under the ITFA as, "a service that enables users
to access content, information, electronic mail, or other services
offered over the Internet and may also include access to proprietary
content, information, and other services as part of a package of
services offered to consumers. Such term does not include
telecommunications services." In addition, the ITFA grandfathered
certain existing Internet access taxes for those states that had
come to rely on them as a source of revenue before the passage of
the moratorium.
Section 1101(a)(2) of the ITFA also placed a
three-year moratorium on multiple or discriminatory taxes on
electronic commerce, which includes state and local sales or use
taxes. The combined effect of these two clauses of the ITFA is the
temporary creation of a "tax-free zone" for Internet access and
certain types of electronic commerce. The E-Freedom Coalition is
proposing that this temporary tax-free zone arrangement be made
permanent for both access taxes and sales or use taxes on electronic
commerce. Moreover, the Advisory Commission should recommend that
any existing state or local taxes that were grandfathered under the
ITFA be phased out or repealed outright.
The Importance of
Making the Ban Permanent
It is vital that the Advisory
Commission understands why the current ban on Internet access,
sales, or use taxes must be made permanent. The case against taxing
the Internet and electronic commerce can be made on both economic
and legal grounds:
The economic arguments against taxing
electronic commerce are strong. First, such taxation is inefficient.
Imposing multiple, overlapping or discriminatory access or sales
taxes on the Internet or electronic commerce in general would be
extremely difficult and inefficient in practice. Having 30,000 or
even just 50 tax jurisdictions and policies would create a confusing
and counter-productive domestic tax regime. Imposing such a tax
regime on the Internet or electronic commerce would also have an
extremely deleterious effect on the Internet sector just as it is
beginning to grow and expand. Industry output and entrepreneurialism
would likely be greatly curtailed as a result.
The negative
effects of a new Internet tax regime would reverberate throughout
the national economy. Almost every American industry is now engaged
in some form of electronic commerce or has initiated Internet-based
services. Imposing burdensome taxes on Internet access or sales
would discourage further efforts in this regard and likely retard
innovation, job creation, and economic growth in general.
The
creation of such a tax regime or regimes would likely require a
significant increase in government tax oversight and enforcement
efforts. Tax collection agencies at all levels of government would
grow larger and more intrusive as efforts to tax electronic commerce
proliferated. The resulting expansion in the overall size of
government would likely lead to more government meddling in the
private sector in general and the high-tech sector in
particular.
Just as the economic arguments against Internet
taxation are strong, so are the legal and constitutional arguments.
The Supreme Court has long held that attempts by a state or local
government to tax or regulate out-of-state activity or "remote
commerce" are unconstitutional. State and local governments can only
tax those parties that have a "nexus" or "substantial physical
presence" within their jurisdictions. Establishing a tax system that
grants state and local governments the right to impose multiple and
over-lapping taxes would reverse two centuries worth of sound
Supreme Court case law and create a disturbing precedent for the
taxation of other forms of interstate commerce.
Beyond
upsetting legal precedent, taxing electronic commerce represents a
direct affront to constitutional first principles and a threat to
America's federalist structure of government in general. The
Founding Fathers included language in Article 1, Section 8 of the
Constitution to allow Congress to "regulate interstate commerce" in
an attempt to remedy the problems the colonies experienced when they
operated under the Articles of Confederation. Excessive parochialism
and perpetual interference with the free flow interstate commerce
forced the Founders to abandon the Articles and instead adopt our
modern Constitution to alleviate these ills. The federal republic
they created allowed for extensive state and local experimentation
and autonomy, but also placed firm limits on the ability of state
and local governments when interstate commerce was at stake. An
important part of America's federalist system of government,
therefore, is an understanding and appreciation of the limits of
state sovereignty. In order for each state to preserve an autonomous
sphere for itself, there must necessarily be limits on its
jurisdictional authority. Simply put, a state's jurisdictional
authority ends at its own borders. Allowing state or local taxation
of the Internet would betray this constitutional first principle by
allowing governments to impose their will on consumers and companies
outside their jurisdictional boundaries.
For these economic
and legal reasons, it is vital that the Advisory Commission propose
a permanent ban on access taxes or any form of discriminatory sales
or use taxes on electronic commerce.
Addressing and Debunking
the "Fairness" Arguments
Despite these arguments, some
members of the Advisory Commission may still resist the adoption of
a permanent ban on Internet access and sales taxes because of
certain "fairness" arguments they have heard repeatedly voiced by
critics of the Internet Tax Freedom Act. These fairness arguments
typically come in two varieties:
r Fairness Argument
#1: It is not fair to exempt remote Internet vendors from
access or sales taxes when "bricks and mortar" or "Main Street"
businesses within a state are required to pay them.
r
Fairness Argument #2: It is not fair to deprive state
and local governments of the revenues that could be collected by
taxing Internet access or electronic sales.
These arguments
represent legitimate concerns that are being raised by a host of
state and local government officials and some Main Street
businesses. Therefore, it is important that the members of the
Advisory Commission address and debunk these fairness arguments to
ensure that taxes are not imposed on electronic commerce.
The
first argument regarding the fairness of exempting remote vendors
from access or sales taxes misses an important point: remote vendors
do not use or deplete state or local resources which state or local
taxes support. In fact, it would be patently unfair to force
out-of-state companies to pay taxes for government services or
programs they do not use or benefit from. State and local businesses
pay or collect such taxes because they can take advantage of the
programs or services provided with those funds. Remote vendors
engaging in interstate electronic transactions do not benefit in a
similar way from these taxes, and shipping companies already pay
taxes to cover their use of public goods and
services.
Moreover, Internet vendors are tangible
"bricks and mortar" businesses that will continue to pay routine
income taxes where they reside. A permanent Internet tax moratorium
would only exclude states and localities from taxing remote vendors
of electronic commerce.
The second fairness argument
regarding the threat a Net tax moratorium would pose for future
state and local tax revenues is equally flawed. The remarkable and
explosive rise of the Internet and electronic commerce is creating a
virtually unprecedented level of entrepreneurialism and innovation
in America. Moreover, this remarkable technological renaissance has
been the driving engine behind America's recent strong and sustained
economic growth.
This has presented policymakers with a
paradoxical situation. The rise of this new unregulated and, for the
most part, untaxed industry sector, has helped fuel the sustained
growth of not only economic activity, but government tax revenues as
well. For the first time in decades, Americans now live in an "Age
of Surplus," where federal, state, and local governments are taking
in record tax revenues. How can this be if critics are correct in
their contention that a tax-free Internet represents a serious drain
on governmental tax collections?
Simple economics explains
the apparent paradox. First, the rise of the Internet and the
Information Economy has created new jobs and new business
opportunities that did not exist previously. In turn, this increased
economic activity and output increased individual income and
business profits, which, consequently, provided new tax sources and
higher revenues overall for all governments. And, again, it is
important to reiterate that simply because interstate Internet
transactions have been exempted from taxes, that does not mean
companies engaging in electronic commerce are completely tax-free.
Electronic vendors are still responsible for paying routine
corporate income taxes and are treated like any other business
within their home states. A permanent moratorium on Net taxes would
not upset this balance in any way.
Conclusion.
Internet commerce -- whether the provision of on-line access or the
transactions undertaken once on-line -- is an unambiguous example of
interstate commerce deserving of protection by Congress from unjust
parochial tax schemes. While the definition of what constitutes
"interstate commerce" has been much maligned throughout America's
history, never before has there existed such an unequivocal example
of interstate commerce in action. And never before has an industry
or a technology so radically revolutionized and energized the
American economy like the Internet. Imposing a balkanized and
Byzantine tax system on this wonderful new technology would
represent a betrayal of time-tested constitutional priorities and
sound economic principles.
Therefore, the Advisory Commission
should whole-heartedly recommend the adoption of a comprehensive and
permanent moratorium on access and sales taxes for the Internet and
remote commerce in general.
Tearing Down Tax-Related
Barriers to Internet Access
Recommendation
#2: Repeal the federal 3% excise tax on
telecommunications
The federal 3% excise tax on
telecommunications is an anachronism that should be repealed
immediately and in its entirety.
The FET was first
established in 1898 as a temporary tax to help finance the
Spanish-American War, and then continued as a "luxury" tax to help
pay for World War I. Today, the FET is third behind alcohol and
tobacco as the largest general fund excise tax in the Federal
budget, raising nearly $5 billion in FY 1998. When state and local
taxes are taken into account, the average tax rate on
telecommunications services in the U.S. is over 18
percent.
Taxes on telecommunications are, inevitably, taxes
on the Internet. Whether through dial-up access or Digital
Subscriber Lines (DSL), over cable modems or wireless ones, access
to the Internet takes place over the telecommunications network.
Indeed, over 50 percent of the traffic on the public switched
telephone network is now comprised of data rather than voice. Thus,
high telecommunications taxes slow the spread of Internet access and
discourage deployment of the broadband networks needed for the next
generation of Internet growth. They raise the costs of electronic
commerce for every business, big or small, and raise the price of
Internet access for every household, rich or poor.
Studies by
the Joint Committee on Taxation, the Congressional Budget Office and
the Treasury Department's Office of Tax Analysis have all concluded
that the FET is the most regressive of all federal taxes. A recent
study by The Progress & Freedom Foundation estimates that at
least 165,000 U.S. households are priced out of the market for fast
Internet access due to high telecom taxes, with the impact falling
disproportionately on low-income and rural households.
The
FET also discriminates against the very sector of the U.S. economy
that is driving economic growth. While the information technology
sector of the economy accounts for less than 10 percent of Gross
Domestic Product, it has produced over 40 percent of GDP growth in
recent years. Jobs created by the IT sector are among the highest
paying jobs in the U.S. economy, with average annual wages in excess
of $52,000, as compared with an economy-wide average of less than
$37,000.
Recommendation #3: Prohibit the
discriminatory ad valorem taxation of interstate
telecommunications
This proposal will encourage
investment in Internet infrastructure by prohibiting discriminatory
state ad valorem property taxation of interstate telecommunications.
It extends the same protection against discrimination that federal
law currently provides to railroads, airlines and other industries
critical to interstate commerce.
As Internet access is highly
dependent on the telecommunications backbone, any excessive taxes on
telecommunications restricts access to the Internet, either through
higher costs to users or under-investment in capital expansion in
telecommunications infrastructure. Available and affordable Internet
access to Americans requires a nondiscriminatory tax burden on
telecommunications service providers.
Other interstate
industries faced with the same inequitable tax treatment have sought
and received federal legislation prohibiting state and local
government from applying property taxes to them in a manner
different than to other business property generally. The first of
these was the railroad industry, which in 1976 received property tax
protection in the Railroad Revitalization and Regulatory Reform Act
(the "4R Act"). This proposal adopts a similar approach for
telecommunications, one that has proven to be effective at halting
discrimination and encouraging investment while respecting state
taxing prerogatives to the maximum extent possible.
State
property tax discrimination against interstate
telecommunications
Discriminatory property taxation
usually takes two forms. First, as part of the concept of unit
valuation, many states tax the intangible assets of public utilities
while not taxing the same assets held by other businesses. These
intangible assets, which include assets as diverse as federal
operating licenses to an assembled work force, are often the most
valuable portion of the utility's business. Second, states often
apply a higher tax rate to the tangible personal property held by
utility companies than that held by other business taxpayers
generally. A recent study by the Committee On State Taxation (COST)
illustrates this fact. Committee On State Taxation, 50-State
Study and Report on Telecommunications Taxation, September 7,
1999.
The COST study found 15 states tax telecommunications'
tangible personal property at a higher rate than other business
property, and 14 states levy an ad valorem tax on telecommunications
intangible property at a higher rate than other business
intangibles. Please note the following chart:
States
that tax telecommunications companies' tangible personal property at
a higher rate: Alabama, Arizona, Arkansas, Colorado,
Florida, Kansas, Maryland, Mississippi, Missouri, New Mexico, South
Dakota, Tennessee, Texas, Virginia, and
Washington.
States that tax telecommunications
companies' intangible property at a higher rate: Colorado,
Kentucky, Louisiana, Michigan, Mississippi, Montana, North Carolina,
Nebraska, Oregon, South Carolina, South Dakota, Utah, West Virginia,
and Wyoming.
The Impact of Discriminatory Property
Taxation
1. Exporting Tax Costs to Non-Resident
Consumers. Non-resident customers are the unwitting victims
of discriminatory property tax practices. Since long distance rates
are typically set nationwide, the tax burden is spread out across
the country, regardless of the tax burdens imposed in the customers'
local jurisdiction.
2. Discriminatory Taxes Result in
Rate Increases, Furthering Digital Divide. The poor spend a
higher portion of their incomes on utilities than wealthier
Americans do. To the degree that discriminatory property taxes are
wholly or partially passed on to customers in the form of higher
utility rates, they constitute a regressive tax aimed at the
nation's less fortunate citizens. Discriminatory property taxes
increase telephone rates on the poor and exacerbate the digital
divide.
3. Competition is Hindered.
Telecommunications service providers that are subject to property
tax discrimination are not able to compete on a level playing field
with those that are not. In this rapidly evolving industry,
different types of companies are now providing an array of
telecommunications services.
4. Existing Remedies
Inadequate. Even if a strong case against a discriminatory
property tax could be made, current federal law severely curtails
such challenges being heard in federal court unless an extremely
high showing is made that the taxpayer has no "plain, speedy and
efficient remedy" available. As a result, these taxpayers must file
an appeal in the state court system and perhaps multiple local
administrative agencies often composed of the same people who assess
the property, thus making it more difficult to gain a fair hearing.
Without federal protections, telecommunications companies are forced
to pay the discriminatory taxes before seeking judicial
review.
5. Inadequate Investment in Internet "Backbone"
Infrastructure. The net result of all of these factors is a
danger that telecommunications companies will make inadequate
investment in the infrastructure backbone that is essential to the
development of the Internet. Discriminatory taxation of
telecommunications property reduces return on such property and
investment in the Internet backbone is diminished as a result.
Improved customer access to the Internet, the World Wide Web and
electronic commerce will only come through lower costs associated
with increased competition and adequate investment. Discriminatory
property taxation of telecommunications companies stands squarely in
the way.
A federal legislative proposal to extend 4-R
property tax treatment to telecommunications carriers engaged in
interstate commerce is sorely needed to protect investment in the
Internet backbone. This proposal affords telecommunications
companies the same tax treatment as their competitors for property
tax purposes. Tax discrimination will be eliminated and increased
investment encouraged. Ultimately, this policy will result in
expansion of the Internet and improved access for all
Americans.
Recommendation #4: Prohibit
government from erecting Internet tolls in the form of above-cost
fees for the installation of telecommunications cable along
right-of-ways.
State and local governments are using
strained interpretations of the 1996 Telecommunications Act to
impose "Internet tolls" in the form of new "franchise taxes" of up
to 5% on business and consumer telecommunications use. With an
average 18.2% transaction tax burden already imposed,22 Committee on
State Taxation, 50-State Study and Report on Telecommunications
Taxation, Testimony before the Advisory Commission on Electronic
Commerce, September 14, 1999. these new taxes and related special
"fees" could easily make telecommunications the most highly taxed
product or service in the United States. Given the critical role
these services play in accessing the Internet, such new taxes are a
true impediment to the growth of widespread access to and use of the
Internet. The Advisory Commission on Electronic Commerce must urge
Congress to take remedial action immediately to clarify the
Telecommunications Act of 1996 and to ensure state and local
government tax policy is not a major contributor to the digital
divide evident today.
The problem lies in the language of
Section 253(c) of the Telecommunications Act of 1996. This provision
states that: "[n]othing in this section affects the authority of a
State or local government to manage the public rights-of-way or to
require fair and reasonable compensation from telecommunications
providers, on a competitively neutral and nondiscriminatory basis,
for use of public rights-of-way on a nondiscriminatory basis, if the
compensation required is publicly disclosed by such government."
Unfortunately, state and local governments are routinely
interpreting this language as granting them authority to impose a
whole new regime of taxation on facilities-based telecommunications
providers and their customers.
The most common of these new
taxes imposed by state and local governments equate "fair and
reasonable compensation . . . for use of public rights-of-way" with
a "franchise fee" of 3%, 4% or even 5% of gross revenues
attributable to customers physically located in the jurisdiction.
Clearly, as found in a number of recent federal district court
cases,2 -- Respectfully submitted by the members of the
e-Freedom Coalition. www.e-freedom.org
Congress
intended this term "compensation" to bear a direct relationship to
the actual costs incurred by state and local jurisdictions in
managing telecommunications facilities located in the public
rights-of-way. Clarification by Congress of what is meant by "fair
and reasonable compensation" is critical lest telecommunications
providers will continue to incur years of costly litigation as state
and local governments repeatedly attempt to impose new taxes never
intended by Congress in adopting Section
253(c).
Specifically, Section 253(c) should be amended to
make clear that state and local governments should be reimbursed
only for their actual and direct incremental expenses incurred in
managing the telecommunications providers' presence in the public
rights-of-way. Clearly, telecommunications providers and their
customers should be responsible for those expenses state and local
governments incur in managing the placement of facilities in the
public rights-of-way. And, just as clearly, Congress never intended
state and local government to create a new tax regime that creates
barriers to entry, discourages the development of facilities-based
competitors and makes it much more expensive for both businesses and
consumers to enjoy the benefits of advanced telecommunications
services and access to the Internet. Accordingly, this new and
detrimental form of taxation must be halted – this type of costly
taxation can only have the effect of slowing the growth of
high-speed access to the Internet.
Local governments have
also misinterpreted Section 253(c)'s language regarding "authority .
. . to manage the public rights-of-way" as providing them with
authority to introduce a third tier of regulatory oversight. These
attempts at local level regulatory oversight of telecommunications
services always result in the telecommunications provider bearing
significant and unnecessary costs. Local governments have repeatedly
attempted to impose regulatory/management requirements on
telecommunications providers that translate into increased costs of
doing business in the local jurisdictions. Of course, these
increased costs are passed along to business and consumer users of
telecommunications in the form of increased rates – a hidden tax.
These new local regulatory/management requirements, e.g. mapping
requirements, facilities planning reports, provision of in-kind
services, undergrounding of facilities, do not constitute
"manag[ing]. . . the public rights-of-way" as envisioned by Section
253(c). Instead, as with new "franchise" taxes, these new local
regulatory/management requirements have the effect of creating
additional barriers to entry, discouraging the development of
facilities-based competitors and making telecommunications services
artificially more expensive. Congress must clarify Section 253(c) to
bar this third tier of regulatory oversight.
Suggested new
language for this subsection is presented below:
· Nothing in
this section affects the authority of a state or local government to
manage the public rights-of-way or to require reimbursement of its
fair and reasonable incremental costs from providers of
telecommunications services. Such reimbursement shall be imposed on
a competitively neutral and nondiscriminatory basis for use of
public rights-of-way on a nondiscriminatory basis. Fair and
reasonable incremental costs shall be limited to actual direct costs
incurred by the state or local government in its management of the
public rights-of-way and shall be publicly disclosed by such
government.
· No state or local government may require any
provider of telecommunications services to provide in-kind services
or to produce, deliver, or otherwise disclose any proprietary
information in connection with such state or local government's
management of the rights-of-way.
Section 253(c) of the
Telecommunications Act was never intended to be the vehicle for
erecting tolls on the information superhighway. The Commission
should urge Congress to clarify the law to ensure that this abuse of
telecommunications consumers is ended.
Recommendation
#5: Simplify state and local telecommunications taxes,
filing and auditing procedures.
State and local
telecommunications taxes are too high, too complicated, and too
numerous. Consumers are burdened by multiple and often regressive
taxes on their telephone service – often used to access the Internet
– while providers must cope with complex filing and auditing
procedures while passing compliance costs along to
consumers.
The Commission should consider the following ideas
to reduce and simplify state and local taxes on
telecommunications:
ü Allow one statewide telecommunications
transaction tax with one rate and tax base applying across the
state. ü Allow local jurisdictions currently imposing a
transaction tax on telecommunications to continue the tax, however,
each local jurisdiction should not impose more than one tax on
telecommunications. ü Require only one return per reporting
period per state. ü Allow only one audit per state for any
taxable period. ü Adopting a nationwide uniform set of rules for
determining the proper state to source a transaction for tax
purposes. ü Adopting nationwide uniform definitions of terms
representing common components of taxable and exempt
telecommunications. ü Provide adequate time to implement changes
to the tax base or tax rates. ü Provide a vendor compensation
allowance to offset the cost of complying with local taxes. ü
Require any state and local transaction tax to follow a uniform tax
base within the state. ü Apply the same rules at the state and
local levels for exempt transactions and customers. ü Require
only one return, filed at the state level, per reporting period with
state distribution of funds to localities. ü Follow a nationwide
uniform set of rules for determining the proper state to source a
telecommunications transaction for tax purposes. ü Follow
nationwide uniform definitions of terms representing common
components of taxable and exempt
telecommunications.
Enacting a Constitutional, Uniform
Jurisdictional Standard
Recommendation
#6: Establish a clear nexus standard and definitions to
determine when companies have sufficient physical presence that they
can be required by a state to collect sales taxes.
The
mission of the Advisory Commission on Electronic Commerce is 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, and international sales activities." The Commission has
been directed to report its findings to Congress, along with "such
legislative recommendations as required to address the
findings."
A recommendation presumes a goal toward which our
efforts are directed. This recommendation for your study and
consideration is directed at a simple goal: promoting the expansion
of economic activity through electronic commerce. Achieving that
goal does not require abandoning state and local taxing authority,
only better defining it. By placing clear parameters on state and
local authority to tax interstate commerce, Congress can reduce the
threat of taxation in jurisdictions in which a business does not
have a substantial physical presence. The U.S. Supreme Court has
long recognized that the Commerce Clause requires a physical
connection between the taxing jurisdiction and the taxpayer. See
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). A
substantial physical presence provides an identifiable standard that
ensures a state's power to tax is limited to taxpayers within its
borders. Nothing will do more harm to the growth of electronic
commerce than expanding state and local taxing authority beyond
their borders.
The threat of taxation is as much an issue as
the obligation of taxation itself. The Supreme Court's decisions in
National Bellas Hess, Inc. v. Department of Revenue of
Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North
Dakota, 504 U.S. 298 (1992), have not been uniformly adhered to
or interpreted. States continually litigate new theories in the hope
of expanding their jurisdiction beyond their borders, not just for
use taxes but other excise and business activity taxes. The cost to
taxpayers in money and time is substantial. All the while,
predictable jurisdictional standards are being eroded. This lack of
certainty is the biggest threat to business on the
Internet.
Encouraging Expansion of E-commerce by Improving
Certainty of State and Local Tax Responsibilities
One of
the biggest hurdles facing businesses engaged in interstate commerce
is simply knowing which tax agencies are involved. For the
on-line business, the uncertainty is positively mind-boggling
because the technology itself poses new questions in jurisdictional
standards. Can an ISP that facilitates the processing of data cause
its customers to have tax obligations in the state, county and city
of the ISP? Does the mere fact that a customer can order via your
web page subject your company to taxation in the state of the
consumer? What about the in-state use of a license or copyrighted
material?
With the exception of PL 86-272, which relates
strictly to state income taxes and to sellers of tangible personal
property, Congress has left the question of the limits of state
taxing authority to the courts. The courts, however, have failed to
solve the problem. Each decision is the subject of subsequent
dispute and argument over its proper application. New theories are
developed and more time and energy spent litigating for certainty
and predictability.
The definition of "substantial nexus" is
most often the subject of dispute. Some decisions suggest that it
applies differently depending on the type of tax. While the Supreme
Court in Quill reiterated the standard of a "substantial
physical presence" articulated in the 1967 decision of National
Bellas Hess, 386 U.S. 753, some states argue their standard only
applies to the collection obligation under the use tax, and not, for
example, to income taxes. See Geoffrey, Inc. v. South Carolina
Tax Commission, 437 S.E.2d 13 (S.C. 1993), cert. den.,
510 U.S. 992 (1993) (foreign corporation's licensing of its Toys 'R
Us trademark in the taxing state and the royalties generated from it
established nexus even without a physical presence).
The
indirect establishment of a substantial presence on the part of the
out-of-state person is another fruitful ground of controversy. Over
the last decade, the states have attempted to expand the theory of
"attributional nexus," which attributes the substantial physical
presence of one person to that of another either by way of agency or
corporate affiliation. Does advertising by an out-of-state company
on a web page that happens to be on a server located in the taxing
state suffice? What about a logo on a web page "hot-linked" to an
out-of-state vendor? What about the in-state presence of a
telecommunications service provider's equipment used by an in-state
resident to order from an out-of-state vendor with whom the
telecommunications company contracts for services? For example,
Texas has asserted that a web site on a Texas server creates nexus
for an ISP's out-of-state customer.
Even if one assumes that
jurisdiction to tax exists, the next layer of uncertainty is
what is subject to tax (tax base) and the appropriate rate to
apply. Computing the proper tax liability is the most intrusive
aspect of taxation and in many cases the most burdensome aspect of
taxation. The more tax agencies involved, the more burdensome
compliance becomes.
Unlike the bricks and mortar business
that state and local governments so often argue are being
discriminated against, the out-of-state retailer is asked to do that
which the in-state retailer is not: determine the place of use for
each of its customers. For example, the brick and mortar
retailer doesn't ask if I'm taking my purchase and going back to my
home which is in a different taxing jurisdiction. They don't care.
The sales tax treats the place of purchase as the place of
consumption. However, if the same transaction occurred online via
the company's web page, different standards would apply. If the
store is in my home state, most likely the sales tax would once
again apply but the seller would first have to determine the
destination of the sale. If the seller was in a different state, the
use tax applies and the seller would have to identify the
destination of the sale and collect and remit based on the rules and
rates for that local jurisdiction assuming the company has nexus
(reliance on zip codes is not legally sufficient as many zip codes
cross taxing jurisdictions). In the purely digital world, where both
the consummation of the agreement and the exchange of the product or
service occur on-line, location is not just irrelevant; it can be
impossible to determine. The use tax is not a surrogate consumption
tax, as some would suggest. It was a device conceived to protect
in-state merchants.
The physical presence standard not only
ensures ease of administration, it properly respects state borders.
The basic purpose of taxation is to raise money for government
services and programs. Why should a business, having no physical
presence in a state, be obligated to contribute to the programs and
services in that state? The argument of a "maintenance of a market"
for the out-of-state business mistakes the nature of that market.
The market exists because of the people, not the government (while
such might be true in a centrally planned economy, it is not the
case in America). And clearly, out of their own self-interest, the
people who live in the jurisdiction properly pay the taxes necessary
to support the roads, education and other infrastructure to meet the
needs of that market.
Subjecting taxpayers to the intricacies
of the tax codes of the jurisdiction in which they are physically
present is not an insignificant burden, but subjecting taxpayers to
all the tax codes in all the jurisdictions of their customers would
create an insurmountable burden to all but the largest
businesses.
Recommendation #7: Protect
consumer privacy by prohibiting government from collecting data on
individual consumer transactions. Allow consumers and companies to
make arrangements to share information.
Extending the
moratorium on Internet taxes is the best way to protect consumer
privacy in the face of an ever-encroaching government collection of
information. If online tax legislation is to be considered at all,
provisions regarding consumer privacy are critical.
It is
clear that any new, expansive tax collection scheme for e-commerce
is undesirable. We do find, however, that while taxes continue to be
collected within the constitutional framework discussed herein, the
privacy of the consumer should be protected as well as or better
than in the analog world, which currently protects consumer privacy
by allowing for cash transactions, which are essentially anonymous.
Developments in privacy protection in the digital world, such as
encryption, should not be stifled by elaborate new tax
schemes.
With the expected rise of anonymous e-cash systems,
the only information from the transaction that needs be collected is
the home state of the consumer. In a sale of physical goods, this
information can be taken from the delivery address given by the
consumer. If a purchase is made of electronic goods, e.g.
downloadable software, the vendor need only collect the home state
of the consumer if there exists, in that state, a physical nexus of
the vendor. Any further information the vendor wishes to collect
would be a decision made between consumer and merchant. Even in the
case of a credit or debit transaction personally identifying
information available to the vendor is not required by the taxing
authority, that is to say that the identity of the consumer is not
revealed to the tax-collecting entity.
In the analog world,
the merchant is the party responsible for the collection and
settlement of the tax bill. Merchants are required, therefore, to
keep records of the merchandise sold to prove actual transactions of
some volume of business, but they are not required to keep records
of the purchaser. This principle should carry over to the digital
world. The only records the merchant must keep for tax collection
purposes is the amount of goods and services sold in each state
where the merchant has a physical presence that satisfies nexus
requirements.
We further find that any proposed sales tax
system can be administered without the necessity of personally
identifiable information being delivered in any way to the taxing
authority -- nor should any so-called independent third-parties be
formed to collect taxes and transaction information, as proposed by
some analysts. Such schemes leave open the threat of government
collection of personal shopping habits.
In addition, we
recognize a fundamental difference between government collecting
information on its citizens and two private parties entering into a
voluntary agreement. Clearly, a merchant knowing your purchasing
behavior for the purpose of making sales recommendations stands
distinct from the government building a profile, for whatever
reason, of your purchases and activities. So, the Coalition does not
recommend any action regarding a company and an individual entering
into a voluntary agreement where a company may openly collect
information regarding its customers.
We also acknowledge that
in an instance where tax is not to be remitted that no collection of
information regarding the transaction is necessary. In other words,
we emphasize that transaction information (as compared to personally
identifiable information, which is never necessary) is only relevant
to taxation when an identifiable nexus exists (such as under the
Quill standard, or an expanded Andal-like standard outlined
above). If the vendor has no nexus in the customer's state, then no
tax is paid, and therefore, the merchant has no need to collect any
data on the purchase for the government.
There are four
principles to which policymakers should strongly and faithfully
adhere:
ü No requirement for the collection of personally
identifying information beyond which may be necessary to collect a
tax, with the recognition that in substantially all cases the
collection of sales tax does not require the collection of any
personally identifying information.
ü No requirement for the
collection of more information in the electronic world than in the
analog world, with the recognition that in substantially all cases
the collection of sales tax does not require the collection of any
personally identifying information.
ü Recognition that the
collection of information by private enterprise, where the consumer
has knowledge of its collection and use, is fundamentally different
than governmental collection of information.
ü No requirement
for any collection of consumer information by or regarding any
merchant that does not have nexus in the customer's state, as no tax
would be remitted.
Again, no particular legislative action is
needed to adhere to these privacy recommendations. However, if
legislative action becomes necessary or desired the above listed
principles of fundamental privacy must be kept in mind.
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