Assembly on State Issues (ASI) and Fiscal Affairs Program
Fiscal Affairs Committee Session Summaries, December 1998
Taxing Internet Commerce--Update and Discussion
 Fiscal
Affairs Committee
Congress succeeded in passing the Internet Tax Freedom Act, which had
the support of NCSL and the other state and local national organizations.
This session provided information about the Internet Tax Freedom Act and
about the National Tax Association's Electronic Commerce Tax Project, in
which NCSL is a participant.
The Internet Tax Freedom Act
Presenter: Neal Osten, Senior Committee Director, Commerce &
Communications committee, National Conference of States Legislatures,
Washington, D.C.
Information about the Internet Tax Freedom Act is available at http://www.ncsl.org/statefed/nettax.htm
The NTA Electronic Commerce Tax Project: An Update
Presenter: Scott Mackey, Chief Economist, National Conference of
State Legislatures, Colorado
The Challenge of Taxation
- The tax system is not in sync with the economy and business activity
-- it was designed in the 1930s and before.
- The tax system is focused on manufacturing and retailing, which have
physical presence requirements.
- Administration of taxes developed independently in the states, with
no regard for multistate compliance burden issues.
The Result of Divergence
- The tax burden is borne by a smaller slice of the economy, e.g.
in-state businesses and in-state residents. Disparities among the types
of actors result.
- There are increasing calls for federal intervention.
- Taxpayers experience complexity and burden.
The Internet as a Case Study
- Geography is effectively irrelevant, both domestically and
internationally.
- Intermediaries and physical presence are not required.
- Knowledge, intangible and service-based.
- Sourcing is complicated.
Results
- The states apply old laws to new circumstances, with resulting
uncertainty, unfairness, and complexity for taxpayers.
- Future erosion of the sales tax base, with an accelerated shift to
remote selling.
The Internet Tax Freedom Act
- Driving forces were fear and the inability to deal with complexity;
a desire for a single set of rules; avoidance of taxation, and
international implications.
Provides for:
- A three-year moratorium on Internet access taxes
- Existing taxes grandfathered
- A prohibition on multiple taxes
- A prohibition on discriminatory taxes
- Establishment of an Advisory Commission on Electronic Commerce to
examine electronic commerce and remote selling, examine
simplification/uniformity trade-offs; and recommend model legislation
- Consideration of subsequent legislation
The National Tax Association Project
- Includes 16 government members (both state and local), 16 business
members and five academics.
Business goals are:
- Rate uniformity--"one rate per state"
- Base uniformity--uniform definitions of goods and services
- Simplified filing requirements
- Single or simplified audits
Government goals are:
- Eliminate the Bellas Hess loophole and provide for collection
of tax on all goods, products and services, whether Internet, mail order
or physically present
- Maintain state ability to set the tax base, but use uniform
definitions.
Project status:
- Agreement on "one rate per state" for all commerce.
- Negotiating on "duty to collect" with discussions about how to
encourage/force states to participate and federal legislation versus
multistate compact.
- Simplified filing system discussion covers electronic collection
system and the "base state" concept.
- Telecommunications taxation.
Key issues for legislators:
- How to set "one rate per state"
- Revenue sharing for local governments
- Federal legislation or multistate compact?
- Is additional revenue worth loss of sovereignty?
Conclusion
- The continued vitality of sales taxes is at stake.
- Are states and business willing to deal?
- Will the Commission help or hinder the process?
For more information on the Fiscal Affairs
Committee, contact Judy Zelio
Updated 10/25/99.
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