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Fiscal Oversight & Intergovernmental Affairs Committee and the Communications and Information Policy CommitteeApril 1999 Session SummariesUpdate on Internet Taxation
Overview of Issues In Taxation of Electronic CommercePresenter: Scott MackeyThe structure of sales tax is based on a nineteenth-century design of taxing business monopolies, which in turn passed the tax to the consumer of their products. We are going into the 21st century with essentially the same tax structure. States rely on sales tax as a source of revenue, but are adversely affected when sales over the Internet result in a decline of local sales. Internet sales are predicted to rise exponentially, therefore NCSL is monitoring federal initiatives affecting state sales taxation and related issues of electronic commerce. Internet Impact on Retailing. The rationale for linking sales taxes to retail businesses is based on the concept of nexus. For example, a business has access to the state’s resources, such as its highways, and nexus in the form of a physical location in the state that makes retailing convenient for its citizens. A physical location in a state also allows a business nexus for soliciting local customers. However, nexus does not exist in electronic commerce because the source of transactions is more complex. For example, the customer may solicit the seller and the transaction is limited to the use of the telephone and either a credit card or electronic cash, such as a debit card. The impact of Internet retailing is that the middleman is eliminated, a physical location for the business is not necessary, products such as music may be in digital format, and the location of the buyer may be unknown as well. For traditional businesses, the Internet will result in shrinking profit margins and stagnation of real estate development for retail locations. In turn, there would be a revenue decrease not only in state and local sales taxes, but also in property taxes. These consequences would encompass rural, urban, and suburban areas. Internet sales are predicted to grow exponentially in short-term future. Internet commerce has grown at a rate of 300 percent since 1996. Sales hit $75 billion in Fiscal Year 1998 and predictions for Calendar Year 2000 range from $200 billion to $1 trillion. Internet commerce can be categorized as:
For purposes of tax revenues, the business-to-consumer transactions will be the category most affected by the growth of electronic commerce. Old and New Tax Issues for States. Old issues include the proposition that if transactions exist, the concept of nexus exists; therefore, a duty exists to collect taxes. However, it is also recognized that the complexity of state and local tax rates places an undue burden on interstate commerce. This situation is also characterized as lacking a uniform basis for taxation. Finally, the concept of fairness between taxing local retailers who provide over-the-counter sales and not taxing Internet retailers remains an issue. With shrinking profit margins, the difference between paying taxes and not paying taxes may be enough to force local retailers out of business, thus affecting not only sales taxes, but property tax revenues as well. New tax issues recognize the fact that digital products, like services, are intangible. The tax structure is not well equipped to enforce taxes on Internet commerce. The location of both the buyer and the seller cannot readily be determined, which can make it impossible for retailers to determine where sales and use taxes should be sent if collected. For example, a business may sell a computer file to a customer and know only their e-mail address, not their physical location. In addition, the final new issue is international; for example, Europe has used the concept of "value-added" tax, and there is international interest in whether Internet commerce will result in the adoption of a value-added tax by the United States. Federalism Threats and Opportunities. The primary threat to the states is that the federal government may preempt state initiatives by extending the three-year moratorium contained in the Internet Tax Freedom Act (ITFA). Although the ITFA was enacted into law on Oct. 21, 1998, there is already movement to extend the moratorium or make it permanent. Second, if states rely on Congress to overturn laws relating to nexus and the duty to collect taxes, there is always the possibility that Congress may add federal initiatives that are not currently in place. So there is a caution to "watch out what you pray for" attitude about relying on congressional action. If either threat of federalism were to materialize, it would pose a long-term threat to the states’ consumption tax base. Opportunities for states are to fix the sales tax themselves, preempt federal action on consumption taxes, and promote tax fairness, allowing the Internet industry to maintain a role of world leadership. Efforts to fix the sales tax among states would require uniform definitions of what will be taxed, to create one tax rate per state, and to use simplified filing and administration of these taxes. The model would be similar to that currently used regarding the trucking industry, whereby the "home state" licenses the truck, collects taxes for all states used by the truck, and distributes tax revenues to those states based on their individual tax rates. Although possible, this approach may not be politically feasible. It would undermine local option sales taxes in some states and would require changes to some state constitutions. The National Tax Association Project is expected to report to the Advisory Commission on Electronic Commerce (as defined in ITFA) that it is not able to reach a consensus on tax reform. Questions and issues remaining for policy makers are as follows:
The Internet Tax Freedom ActPresenter: Neal Osten Internet Tax Freedom Act. This act was designated S.422, and attached to the Omnibus Spending bill, H.R. 4328. It was signed into law on Oct. 21, 1998. The law prohibits state Internet taxes for three years beginning Oct. 1, 1998 until Oct. 21, 2001. The moratorium includes discriminatory taxes and multiple taxes. Exceptions include designed states and cities that had imposed and enforced such taxes before Oct. 1, 1998. Discriminatory taxes are defined as any tax generally imposed by a state or local government on electronic commerce that is not imposed and legally collectible on transactions involving similar property, goods, and services or information accomplished through other means or at the same rate. States may not impose an obligation to collect or pay the tax on a different person or entity than in the case of transactions involving similar property, goods, and services or information accomplished through other means. Multiple taxes are generally defined as any tax imposed by a state or a political subdivision of the state on the same or essentially the same electronic commerce that is also subject to another tax imposed by another state or political subdivision without credit for taxes paid in other jurisdictions. This prohibition against multiple tax shall not apply to "piggyback" state and local taxes. The law also creates the Advisory Commission on Electronic Commerce.The commission is to have 19 members. These are to include three federal appointees, including the Secretary of Commerce, the Secretary of Treasury, and the United States Trade Representative, eight state and local officials, including at least one appointee from a non-sales tax jurisdiction and one from a non-income tax state, and eight representatives from the electronic commerce industry, telecommunications carriers, local retail businesses, and consumer groups. The commission is to study Internet taxation issues and issue a final report to Congress 18 months from the date of enactment (April 2000). The study is to
Appointments to the commission were made on Dec. 7, 1998. However, the composition of those appointed was not in accordance with the provisions in ITFA. Congressional leadership appointed two additional industry representatives for a total of ten, and two fewer state and local officials for a total of six. This is a variation from the provisions of IFTA, which stipulated eight industry representatives and eight state and local officials. In February 1999, the National Association of Counties and the United State Conference of Mayors brought legal action against the congressional leadership and non-government members of the Advisory Commission. These associations are seeking the federal courts to correct the imbalance by increasing the number of local officials serving on the commission. Although there has been a switching of one appointee, the imbalance continues and the Advisory Committee has not yet had its first meeting to elect its chairman. It is anticipated that Governor Jim Gilmore of Virginia will be elected chairman, and he has announced three meetings of the commission -- June 1999 in Williamsburg, VA; Dec. 1999 in San Jose, CA; and March 2000 in Austin, TX. As of April 1999, the commission has about 12 ½ months remaining to complete its work and issue a report. However, the legal action may prevent the commission from meeting until the dispute over appointments is resolved.
Summary by Bill Humbert, Florida Legislature, Office of Program Policy Analysis and Government Accountability.
For more information on the Fiscal Affairs Committee, contact Judy Zelio Updated 10/25/99. |
