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Executive Committee Task Force on State and Local Taxation of Telecommunications and Electronic CommerceMinutes of the Sixth MeetingTampa Bay, Florida Members Attending:Representative Matt Kisber, Tennessee, Co-Chair Legislative Fiscal StaffDave Crotts, NC Fiscal Research Division NCSL Staff:William Pound, Executive Director Friday January 14, 2000The Co-Chairs, Representative Matt Kisber of Tennessee and Senator Steven Rauschenberger of Illinois, welcomed the Task Force and called the meeting to order. Each member of the Task Force, NCSL staff, and observers introduced themselves and as a group thanked AT&T for providing lunch. Senator Rauschenberger open by saying he was very impressed with the work of the Task Force and staff, and expressed appreciation for the continued support from NCSL. He noted the Internet tax issue is one of the most important issues on which he has ever worked. Representative Kisber echoed Senator Rauschenberger's comments and said he was gratified with the growing recognition of the Task Force's work. Representative Kisber recounted his testimony to the federal Advisory Commission on Electronic Commerce (ACEC) on December 15th, 1999. He said he was proud to be a part of the Task Force and to have the opportunity to represent it. Representative Kisber pointed out that it was interesting that the state and local members of the ACEC seemed firmly set on one side of the issue or the other, whereas the industry Representative s seemed more receptive to new ideas. The Task Force for then watched several video clips, including one of Representative Kisber's testimony to the ACEC, and a clip of Senator Rauschenberger, Mayor Ron Kirk of Dallas, and David Bullington from Wal-Mart taking part in a panel discussion hosted by the National League of Cities. The Task Force discussed the growing media coverage of the issue. Senator Rauschenberger emphasized the importance of the Task Force members staying on meeage when dealing with the media. He suggested the focus should be on creating equity in the tax structure between main street brick and mortar retailers and Internet vendors, and on the fact that the sales and use taxes on remote sales already exist. Scott Mackey, Chief Economist for NCSL, told the Task Force that NCSL would try to make media tools available for the Task Force in the coming weeks. One such tool would be a study scheduled to be released shortly by Dr. Bill Fox from the University of Tennessee. Mr. Mackey explained that the study would include a state by state break down of future state revenue losses due to non-collection on remote sales and due to the shrinking sales and use tax bases. Model LegislationThe focus of the meeting then shifted to the mark-up of the proposed model legislation to allow state revenue departments to participate in multi-state discussions on the design of a voluntary, streamlined sales and use tax collection system. The Co-Chairs reminded the Task Force that while the model legislation would represent a considerable amount of time and effort spent on the issue, the Task Force still had several other important issues to deal with in the coming months. Among those issues, telecommunications tax reform, uniform sales tax exemption policies, and the specific simplifications needed to participate in the streamlined system. Senator Rauschenberger expressed his feeling that the streamlined plan will prove to be infectious if a core group of states pass the model bill quickly. Scott Mackey offered a general overview of what the draft legislation would accomplish before the Task Force went through the bill line by line. Mr. Mackey explained the bill would authorize the revenue departments of each state to enter into discussions with other participating states and with potential Trusted Third Parties. He expressed the hope that a few states would pass the model legislation by the time the ACEC makes its final report to Congress in April. Mr. Mackey went on to say that though some legislatures may not need to pass the legislation from an authorization standpoint, it is still important to pass the legislation to show Congress that the states are serious and capable of fixing the system without Congressional preemption. Neal Osten added that by passing the legislation, the legislatures would let the governors know that they are behind them, and would achieve legislative buy-in to the system on the front end of the process. Mr. Osten continued that because of the political nature of the issue, the ability of states to fix the system might be questioned if the model bills failed in some states. Therefore he thought it important to target states in which both the legislatures and governors were favorable. Mr. Mackey then went on to explain each section of the model legislation: Sec. 1: TitleSec. 2: Findings (Optional) Sec. 3: Language enables state revenue departments to enter into negotiations with other states and businesses. (Mandatory) Sec. 4: Authorizes state to participate in an early "Pilot Project" with one or two other states and several vendors to make sure the system will work in the real world. (Optional) Sec. 5: Requires any Trusted Third Party to abide by the same confidentiality laws that the State must follow. (Mandatory) Sec. 6: Creates a legislative oversight committee within the state. (Optional/ Unique to State Rules) Sec. 7: Requires a final report to the Governor and Legislative Leaders (Optional/ Unique to State Rules) After explaining each of the sections in the model bill, Mr. Mackey explained that there were two amendments, suggested by Dan Bucks of the Multistate Tax Commission, that could also be considered along with any others the Task Force would like to offer. The first amendment would appropriate funds to cover any costs incurred by the revenue departments. The second amendment would create a multi-state legislative oversight committee. Discussion of the Model Legislation: Senator Joanne Emmons suggested that there should be an annotated version of the model bill including margin notes, which would define the scope of the discussions and explain which sections are mandatory and which sections should be crafted to fit the constitutional/legislative protocols in each state. The notes, according to Senator Emmons should also make it clear that the legislation could be enacted in the form of a bill or a resolution. Delegate Nancy Kopp remarked that it was important not to make the states feel "brow-beaten" into blanket language. Representative David Ennis agreed, but added that the other side could be equally dangerous, explaining that this bill could not be seen as just another bill, so it had to be well defined and ready to go. The Task Force agreed that there should be a preamble to the model legislation as well as margin notes to make necessary explanations including areas of flexibility. Specific changes were suggested and agreed to by votes of the Task Force. The Task Force rejected the proposed amendment appropriating money to the revenue departments. The group recognized that departments in smaller states might incur a higher relative burden, however, putting an appropriation into a model bill might provide give new arguments to defeat it in certain states. The Task Force also noted that not including an appropriation in the model legislation would not prohibit individual states from doing so. Likewise, the Task Force agreed not to include language establishing a multi-state oversight committee citing that there was no compelling reason to include the potentially controversial element into a model bill. Mr. Osten suggested the Task Force might serve in that capacity, and the members agreed to request the NCSL Executive Committee to approve such a role for the Task Force. The amended model bill was unanimously approved by the Task Force. The session ended with a discussion on political strategy in the states and on the national level. Mr. Osten informed the Task Force that the American Legislative Exchange Council (ALEC) had passed a resolution on electronic commerce calling for a lengthening of the current federal moratorium. ALEC had also issued a press release that had created an impression around the trade publications that implied that ALEC's position was in opposition to NCSL's position. Mr. Osten explained that this perception could cause PR problems for NCSL as a whole, as well as endanger the model legislation in the states. Pete Poynter from Bell South, a member of the ALEC Board apologized for the mention of NCSL in the press release, and explained that it was a mistake by a new employee and the situation had been remedied. He went on to say the respective positions of ALEC and NCSL are actually quite close. Mr. Osten followed up the discussion by pointing out that the best course of action would be to deal personally with ALEC members in the states. Mr. Osten submitted that a public debate between legislators would undermine both NCSL and the Task Force's strong credibility on the issue. Members suggested that invitations should go out to ALEC leaders to attend upcoming Task Force meetings, as well as meeting with leadership in Washington, DC. Mr. Osten mentioned that the closing session of the upcoming NCSL Leader to Leader Meeting in Washington would be a presentation on electronic commerce and would be followed by a meeting between state revenue people, governors' staff, and legislators. All from the Task Force would be welcome. Finally Alan Johansen, asked the Task Force to think about the down side of getting on board with the growing consensus to ban sales taxes on Internet access. He explained he understood the practical and fiscal problems with such a position, but asked if the ban was an inevitable result, couldn't NCSL save some important political capital by agreeing to it. Senator Finan pointed out that even if it were inevitable, inherent in such a proposal would be a huge danger of damaging provisions being added on the floor of Congress. Furthermore, the Task Force agreed the issue was basic to the defense of federalism and NCSL should oppose any efforts for the federal government to dictate tax policy to the states. The session ended for the day. Saturday January 15, 2000The Saturday morning session began with a final reading of the model legislation. After a few technical corrections and a short discussion about which sections would need margin notes, the Task Force endorsed the model legislation unanimously and sent it to the NCSL Executive Committee for final approval.* The group then identified states likely to adopt the legislation: Idaho, Maryland, Ohio, Pensylvannia, S. Dakota, Tennessee, and Utah. Senator Finan expressed hopes of getting a core group of states to pass the legislation quickly and work together throughout the process. The Executive Committee gave unanimous approval to the Model Legislation on 1/15/00. Discussion then shifted to NCSL strategy in regards to the ACEC. Mr. Osten noted the next meeting of ACEC would be in Dallas, March 20-21, which would consist solely of Commissioners discussing proposals among themselves. Mr. Osten said he felt there was a strong possibility that a positive recommendation could receive majority supportive, however a supermajority was still very unlikely. Further it was possible the ACEC would submit a paper with three or four policy options. The question on the table for the Task Force was whether to focus its efforts on the ACEC or on Congress. Senator Rauschenberger suggested NCSL might facilitate in setting up appointments with Task Force members' congressional delegations in Washington. Senator Finan agreed, explaining the ACEC seemed to be fairly well deadlocked, and efforts would be more effectively spent making and shoring up friends in Congress. Senator Finan also suggested a press conference with congressional allies. Senator Emmons added the Task Force has more natural influence over Congress than the ACEC, citing specifically reapportionment powers of the legislature. The Task Force agreed to focus lobbying efforts on Congress and asked the NCSL staff to facilitate meetings and/or lobby days on the Hill. Specifically with respect to lobbying Congress, Representative Ennis suggested that Senator Roth (R-DE) could prove to be a important ally if educated on the unfunded mandate implications of bills like the McCain/Kasich. As far as focus on legislation, Alan Johansen suggested that the McCain/Kasich bills are unlikely to move in the shortened legislative season. Mr. Johansen asserted that efforts to codify Quill would be far more likely and very damaging to the states. Scott Mackey noted that the Andal proposal to codify Quill in front of the ACEC, would actually go beyond sales tax, and potentially limit states' ability to collect corporate income tax. Mr. Osten offered a lobbying strategy, the key being to emphasize that the current moratorium will not expire for another year and a half and that the ACEC will not even report to Congress until late April. For these reasons, an effective message may be that there is no reason for this Congress to act at this time. Senator Rasuchenberger concluded the discussion, reminding everyone that it was very important to keep this issue away from partisan politics in the state legislatures. Telecommunications Tax ReformThe discussion then shifted to telecommunications tax reform. Senator Rauschenberger opened by explaining that he felt he had a unique perspective on the issue because the Illinois Legislature had been evaluating new interconnection laws as well as electric deregulation. Like electric, gas, and utilities taxes, telecommunications taxes were based on monopoly structures. Senator Rauschenberger said he came to the discussion thinking telecommunications reform has to get down to definitional history. He thought transactional taxes might be an avenue to explore to get away from technology specific problems. Further, he noted the local government organizations would likely be opposed to such efforts, and was interested in hearing the thoughts of the Task Force. Deborah Bierbaum from AT&T and Molly Feldman from GTE presented to the Task Force a proposal put forth by a "diverse" coalition of telecom companies. The presenters reiterated to the Task Force that the telecommunications industry was taxed more than any other industry and the tax system were the most complex. Ms. Bierbaum and Ms. Feldman explained the coalition had already recommended the proposal for endorsement from the ACEC, which would ask Congress to encourage the states to reform in specific areas and create congressional oversight. The proposal took the form of two distinct sections. First the plan called for simplification of state telecommunications tax structures. Second the plan called for an end to discriminatory taxes on the telecommunications industry. The industry coalition suggested two possible avenues to achieve the desired simplification in part one of their proposal. Option A:
While Ms. Bierbaum expressed that Option A would be the industry's first choice, she said that the coalition recognized that several of the provisions would be politically difficult in certain states, such as one rate per state. With that in mind she presented the alternative option which, she said tried to address those political concerns. Option B:
Ms. Feldman explained the second component of the industry proposal. She pointed out that the current state and local taxes were discriminately higher for telecommunications companies. Further, she argued that because telecommunications are the backbone for the Information Age, it was poor public policy to impair the sector of the economy that is creating the most growth and innovation. Ms. Feldman acknowledged that the process to end discriminatory taxes was a long term goal as state and local governments would have to deal with serious budgetary questions. However, she laid out three areas the industry proposes should be changed:
Ms. Bierbaum and Ms. Feldman thanked the Task Force and asked for it to endorse the proposal and to ask Congress to facilitate state actions and set up oversight. Finally they pointed out that the industry had tried to incorporate some of the techniques utilized in the mobile sourcing proposal to achieve a reasonable compromise. Alan Johansen gave a brief description of the telecommunications tax reform movement in Florida. He explained that it started in 1996, and that originally, the process was moving toward a plan similar to Option A in the industry proposal. However, Mr. Johansen noted that several problems arose. First, there would have been a shift in the tax burden onto local taxpayers that did not already pay a local option tax, as the one rate would likely have been a blended rate of some sort. The second problem was the locals' lobbying efforts to maintain the status quo. For each of these reasons, Florida moved to a system that looking a lot like Option B, with one rate per state plus a local option, one return, and one audit. Senator Rauschenberger told the Task Force that along with easing the tax burden on the industry, there should be motivation for the states to simplify their telecommunications taxes as the possibility of losing future court cases on the issue are high and states might thereby losing some taxing authority. Senator Nething remarked that he was impressed with the proposal and the consensus that was building around it. He continued that he was convinced that there will soon be enough competition and the industry should be taxed similarly to other sectors. Senator Nething expressed however, that there will be some serious political difficulties in actually passing such a proposal in the states. First, he mentioned the shear size of the job transitioning from a quagmire of rules to an "enlightened" system. Secondly, the question will become, how do you get the local governments weaned off the revenues from the current system. On the whole though he thought the plan was a step in the right direction. Ms. Bierbaum was asked about the cost to the state for the tax databases proscribed in Option B. She answered that the cost would vary from state to state based on the complexity of the tax system in place. The more complex the system, the more expensive the database would likely be. Del. Kopp suggested endorsing the plan conditionally, noting that she while comfortable with the recommendations for state simplification, she was not comfortable asking for Congressional action. The Task Force agreed that it could not support the language in Part C (asking for Congressional involvement) of the coalition proposal and put the rest of the plan to a vote. The Task Force endorsed the proposal unanimously and sent it to the AFI Commerce and Communications Committee for consideration at the Spring Meeting. The Task Force thanked the presenters and concluded the business portion of the meeting. Senator Rauschenberger and Representative Kisber thanked the members for their continued hard work and motivation. They listed tasks that still lay ahead for the group:
The next meeting was set for the weekend of April 1-2, 2000 in Denver. The Meeting was adjourned. Prepared by Graham Williams, NCSL |
