Washington Report

Keeping Members Informed About Regulatory Issues

Contents
Jan. 2000

CATALOG ISSUES UPDATE

For further information about the following subject or any other catalog-related questions, contact Ross Starek, senior vice president for the catalog industry, at 202-861-2419 or rstarek@the-dma.org.

The Advisory Commission on Electronic Commerce held its third meeting in San Francisco December 14-15, 1999. The Commission’s Work Plan Subcommittee divided the issues the Commission needs to address into three broad topics: (1) state, local and federal taxation issues associated with Internet access and telecommunications; (2) state, local and federal taxation issues associated with electronic commerce; and (3) international taxes, tariffs and duties. The first two topics were discussed at length during the second Commission meeting in September.

The San Francisco meeting began with a panel discussion on the third issue topic. The Commission heard from and questioned tax policy authorities for the European Commission (EC) and the Organization for Economic Cooperation and Development (OECD). The European officials discussed their approach to taxing Internet access and e-commerce transactions and explained how member countries’ Value Added Taxes (VAT) were assessed and collected. There was also an extensive discussion of the U.S. and other countries’ positions on international tariffs and duties on the Internet at the recent World Trade Organization Ministerial meting in Seattle. The Commission appears to have reached a consensus opposing tariffs and duties on Internet access and transactions.

Following the September Commission meeting in New York City, the Commission placed a notice in the Federal Register asking for proposals from any interested party that would suggest changes to the current scheme of sales and use tax collection. A total of 39 proposals that recommended some simplification and relief from collection burdens were submitted to the Commission. The Commission identified twelve proposals that addressed all the various approaches to sales tax collection and simplification and heard presentations describing the plans.

Generally, three approaches received the most attention and generated significant debate. The first concept, supported by Governor Jim Gilmore (R-VA), Chairman of the Commission, some industry associations, and several Members of Congress, would prohibit sales and use taxes on Internet transactions. A second approach that has garnered some Commission support would recommend to Congress that Internet transactions be taxed just like all other remote transactions: sellers collect where they have nexus to a state. This plan, offered by Commissioner Dean Andal, Chairman of the California Equalization Board, asks Congress to codify the Quill decision. The third proposal that received quite a bit of attention was offered by the National Governors Association (NGA) with the support of some state and local government associations.

This plan, referred to as the "Zero Burden Proposal," suggests that state and local governments have 2-5 years to phase in a voluntary collection system that would utilize "trusted third parties" to collect sales taxes on remote transactions. The plan calls for the use of sophisticated software (not yet developed) that would be provided to participants by the states to collect taxes. The sponsors say that this system would remove the collection and most of the compliance burdens from the sellers. Moreover, the proposal specifically rejects recommending legislation that would overturn Quill.

The Commission also heard reactions to the various proposals from an industry panel composed of corporate tax executives. Officials from Dell Computer, Hewlett Packard, Value America, Wal Mart, Cisco Systems, and Federated Department Stores offered views on the feasibility and burdens of the plans. Frank Julian, Operating Vice President & Tax Counsel of Federated and chairman of The DMA Use Tax Steering Committee, testified on this panel.

He expressed concern over several aspects of the Zero Burden Proposal put forth by the NGA. Julian pointed out that the proposal raises many serious questions both for Federated and for other retail companies. He then discussed 13 issues that should be carefully considered by the Commission and the proposal’s sponsors, among them:

• Determination of taxable items: Determining the taxability of certain categories of products, such as clothing, food and medicine, is extremely complicated for a multi-state business.
• Compatibility of software: Different industries use different methods (such as a "department and class" designation, SKU number, etc.) to identify which of their products are and are not subject to tax in those jurisdictions where they have collection obligations.
• Protection of proprietary data: As vendors develop new products, they will presumably be required to provide information about these products to the Trusted Third Parties in advance of advertising them for sale, so the taxability can be inputted into the system. Due to the competitive nature of business, however, most companies will have legitimate concerns about prematurely disclosing their product mix to a third party, particularly in the case of unique items which the seller has developed itself.

Julian encouraged the sponsors of the Zero Burden Proposal to solicit significant input from those who will be most impacted by it: the business community and the tax-paying public. For a complete copy of Mr. Julian’s testimony, please contact either Wil Cruz at 212-768-7277 (wcruz@the-dma.org) or Stephen Altobelli at 212-790-1529 (saltobel@the-dma.org).

Finally, the Commission spent a considerable amount of time discussing and revising an Issues and Options paper that had been prepared by the Report Drafting Subcommittee. The paper will serve as the working draft for the final report to Congress. It identifies the issues that the Commission has decided need to be addressed, discusses all the options that the Commission has on those issues, and reports a preliminary consensus if it exists.

Even though resolutions offered by Commissioner Grover Norquist, president of the Americans for Tax Reform, prolonging the moratorium on Internet access taxes and recommending repeal of the 3% federal excise tax on telecommunications were tabled as premature, it appears that the Commission has reached a consensus on recommending these initiatives to Congress. There is no consensus, however, on the much more controversial and contentious issues regarding sales and use tax collection on Internet and other remote transactions.

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