I
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:
1. Barrier #1: The federal 3%
excise tax on telecommunications. The tax is an anachronism and should be repealed
immediately.
2. 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.
3. 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.
4. 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.
5. 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:
1. 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.
2. 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 [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, 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:
- Allow one statewide telecommunications
transaction tax with one rate and tax base applying across the
state.
- 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.
- Require only one return per reporting
period per state.
- Allow only one audit per state for any
taxable period.
- Adopting a nationwide uniform set of
rules for determining the proper state to source a transaction for
tax purposes.
- Adopting nationwide uniform
definitions of terms representing common components of taxable and
exempt telecommunications.
- Provide adequate time to implement
changes to the tax base or tax rates.
- Provide a vendor compensation
allowance to offset the cost of complying with local taxes.
- Require any state and local
transaction tax to follow a uniform tax base within the
state.
- Apply the same rules at the state and
local levels for exempt transactions and customers.
- Require only one return, filed at the
state level, per reporting period with state distribution of funds
to localities.
- Follow a nationwide uniform set of
rules for determining the proper state to source a
telecommunications transaction for tax purposes.
- 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:
1. 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.
2. 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.
3. 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.
4. 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.
###
Respectfully submitted by the members of the
e-Freedom Coalition,
www.e-freedom.org |