Sales And Use Tax The Advisory Commission On Electronic Commerce

January 2000

BACKGROUND

In October 1998, Congress enacted the Internet Tax Freedom Act. This legislation, which was strongly supported by The Direct Marketing Association, places a three-year moratorium on the imposition of any new state and local sales tax on Internet access (e.g., the monthly fee a consumer would be charged by an Internet Service Provider for access to the Internet.). The legislation also creates a 19-member commission, the Advisory Commission on Electronic Commerce, to review a variety of tax issues relating to electronic commerce, including the taxation of all interstate commerce (whether via the Internet, or the more traditional media such as telephone or mail) and report its recommendations to Congress by April, 2000.

The Commission consists of three Federal Government representatives: the Secretaries of Commerce and Treasury and the United States Special Trade Representative; and sixteen Congressionally-appointed representatives: eight from "business and consumer groups" and eight representatives of "state and local government." Importantly, no recommendation on a policy can be made to Congress unless 13 of the 19 members (or 2/3) of the Commission support it. Governor James Gilmore (R-VA) was elected chairman unanimously by the Commission members at the first meeting. The Commission has held meetings in June, September, and December, 1999 and has a final meeting scheduled for March, 2000.

DM IMPACT

Any change in the current system of requiring only companies with nexus to a state to collect sales and use taxes would impose a significant burden on direct marketers.

CURRENT STATUS

The Commission has organized its work pursuant to a work plan drawn up by a Commission subcommittee. The work plan divided the issues the Commission needs to review into three 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.

During its meetings, the Commission has heard from a variety of witnesses and experts on these topics. Most Commission members appear to support recommendations to Congress to repeal the federal excise tax on telephone service and to continue the moratorium on Internet access taxes.

The discussion on taxes on electronic and other remote commerce has been much lengthier and more controversial. In general, many Commissioners believe that the current sales tax system is cumbersome and probably not an appropriate method of taxing commerce in the next century. Commissioner Michael Leavitt, Governor of Utah, convinced the Commission to issue a general call to submit proposals to revamp the current taxing scheme. The Commission placed a notice in the Federal Register asking for proposals from any interested party that would suggest changes to the current system 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.

Generally, three approaches received the most attention and generated significant debate. The first concept, supported by Chairman Gilmore, some industry associations, and several Members of Congress, would prohibit sales and use taxes on all 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 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. At this point, however, there is no Commission consensus on the controversial and contentious issues regarding sales and use tax collection on Internet and other remote transactions.

DMA ACTIVITIES

The DMA worked hard to alter the original legislation so that a two-thirds vote is required for any recommendation. DMA staff has and will continue to meet with members of the Advisory Commission to explain the importance of the issue to the direct marketing industry. In addition, DMA's Senior Vice President for the Catalog Industry is attending every meeting as an observer. Further, DMA's tax counsel testified at one meeting of the Commission, and the chairman of DMA's Use Tax Steering Committee testified at another meeting.

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