Commission Fails To Reach Consensus on E-Commerce

By Larry Jones
April 3, 2000

At its fourth and final meeting, the Advisory Commission on Electronic Commerce failed to reach formal consensus on one of the key issues it was created to address—whether and how Internet sales and other forms of remote commerce should be subject to state and local sales taxes. During the two-day meeting in Dallas on March 20 and 21, eleven of the 19 members voted in favor of submitting a proposal to Congress that calls for new tax exemptions and loopholes that would significantly erode state and local revenues. Although the Commission is prohibited by law and by its original operating rules from submitting recommendations in a final report “unless agreed to by at least two-thirds of the members,” a coalition of six business and 5 anti-tax representatives decided to send the report even though it fell two votes shy of the 13-vote super majority required.

Dallas Mayor Ron Kirk and other government representatives voiced strong opposition to submitting a simple majority report and argued that it was not only unlawful, but violated the Commission’s own original rules, which the 11 members voted to change during the meeting. To lend support to the Commission’s decision, Virginia Governor James Gilmore, III cited a letter from Senate Majority Leader Trent Lott (MS) urging the Commission to submit the report despite the fact that it lacked the 13-vote super majority required by law. But Mayor Kirk and others were quick to point out that the Commission also received a March 20 bipartisan letter from Senate Minority Leader Tom Daschle (S.D.), Senator Mike Enzi (WY), Senator Bob Graham (FL) and Senator George Vionovich (OH), urging members “not to ignore two-thirds recommendation requirements.”

Under the proposal adopted by the Commission, state and local governments would be required to adopt a number of tax exemptions and special carve outs that would benefit companies with representatives on the Commission. In return, the proposal only promises to establish another commission that will consider, five years from now, whether to recommend that state and local governments be allowed to collect taxes on remote sales. Mayor Kirk called the proposal “nothing more than a money grab,” by business representatives on the Commission and implored them not to recommend a solution that serves their own self interest but one that would create a level playing field where state and local sales taxes would be applied equitably to all commerce. “The government should not be in the business of choosing winners and losers but of setting standards for all businesses to compete on a level playing field,” he said.

A March 29 Washington Post article describes in detail how the proposal’s tax breaks for companies with affiliates would benefit Gateway, which recently turned its 240 stores around the nation into affiliates; how sales tax exemptions on digitized goods such as books, movies magazines, music compact disk and electronic games downloaded over the Internet (and functionally equivalent products sold over the counter) would benefit America Online and Time-Warner; how the repeal of the 3 percent federal excise tax on telecommunications services would benefit AT&T and MCI WorldCom; and how sales and income tax exemptions for local affiliates of online concerns would benefit Charles Schwab. All of these companies have representatives on the Commission.

In brief the proposal adopted by the Commission calls for:

• a five-year prohibition on the taxation of digitized goods downloaded over the Internet and their non-digitized counterparts sold over the counter, and an extension of the current three year moratorium on multiple and discriminatory taxes for an additional five-year period. This exemption would cause state and local governments to lose billions of dollars annually. In just four states, Florida, Texas, Washington and Wisconsin, the estimated loss would exceed $1 billion per year.
  

• a clarification of the nexus rules for sales tax purposes so that certain factors will not, in and of themselves, establish a seller’s physical presence in a state and require the collection of state and local sales taxes. Under current law, sellers have an obligation to collect state and local sales taxes if they are physically located in a state. Under the proposal, a seller’s use of Internet service providers, telecommunications services and affiliates physically located in a state would not establish physical presence. These loopholes will enable remote sellers to enter into a variety of arrangements with entities that have a physical presence in a state to market their goods and services and avoid tax collection obligations.
  

• a clarification of the nexus rules for income tax purposes so that certain activities would not be taken into account in determining physical presence for purposes of income tax collection obligations. As with the sales tax, the proposal would prohibit consideration of relationships with an affiliate, Internet service provider and communications services in determining income tax nexus. It would also prohibit states from considering the ownership of intangible property in a state, and a sellers voluntary registration for the collection and remittance of sales taxes in determining nexus for the purpose of income tax collection obligations.
  

• the adoption of one sales and use tax rate per state for all remote commerce and other uniform/simplification standards. The proposal encourages state and local governments to work with the National Conference of Commissioners on Uniform State Laws to develop model legislation by October 21, 2004 that would simplify state and local sales and use tax policies in order to create parity between remote sellers and Main Street merchants with respect to the collection of state and local taxes. It would also set up a new commission that would oversee the progress of NCCSUL’s efforts to create uniform sales and use tax laws and recommend to Congress by April 21, 2005 whether states that adopt the model legislation should be permitted to apply such taxes. In addition to the one rate per state, the model legislation would require states to adopt uniform tax bases definitions, uniform vendor discounts, uniform sourcing rules, uniform audit procedures, and a methodology for maintaining revenue neutrality in overall sales and use tax collection within each state (such as reducing the state-wide sales tax rate to account for any increased revenues collected from remote sales and other changes). The single rate per state poses serious problems for state and local governments. Under the proposal, local governments that have sales and use taxes would retain their ability to impose such taxes on local retail but would have to look to the state for collection of taxes on remote sales. Local tax rates on goods sold at local retail stores would most likely be different from the single rate on remote sales. In such cases, local retailers could end up being subjected to collecting higher taxes than their remote counterparts.
  

• a permanent ban on state and local sales taxes on Internet access fees including the grandfather protection afforded state and local governments under the Internet Tax freedom Act. This would affect 10 states and several cities in the state of Colorado with an estimated revenue loss of $50 million per year.
  

• the elimination of excess tax burdens on telecommunications real, tangible and intangible property; the elimination of industry specific and higher transaction tax rates; and afford similar treatment of telecommunications infrastructure in states that exempt purchases of certain types of business equipment from the sales and use tax. To achieve these goals, state and local governments are again encouraged to work with NCCUSL to draft model legislation within three years that would require states to follow one of two simplified tax structure models. State and local governments oppose federal intervention in this complicated area and are already working with the telecommunications industry to simplify telecommunications taxes. A one-size-fits all federal scheme will not work.
  

• the elimination of the 3 % federal excise tax on communications services. This would require offsetting cuts in other federal programs.

During the meeting, the business caucus led by Time-Warner President Richard Parsons and Charles Schwab Corporation President David Pottruck met at several intervals with Utah Governor Michael Leavitt, Washington Governor Gary Locke and Mayor Kirk and reportedly came close to agreeing on a compromise that they hoped would win the support of a super majority. But changes in the nexus rules became the sticking point. Both sides seemed willing to compromise on most of the other issues but government representatives in the end would not agree to the changes in nexus that would create tax exemptions and loopholes for special interest at the expense of taxpayers.

In a March 30 conference call, members voted down a motion to provide government members more time to review changes in the final report. The Commission is expected to submit its final report to Congress by April 21. Also, Governor Gilmore is expected to testify before House and Senate oversight panels on April 5 and 6 to discuss the Commission’s recommendations.

The Conference and other state and local groups are still promoting the voluntary streamline sales tax proposal which would require states to adopt model legislation to simplify state and local sales tax systems, eliminate tax collection burdens on remote sellers, use high tech to assist in the collection of taxes, and provide incentives for state and local governments to participate in a multi-state arrangement to collect taxes on remote sales. As of March 29, nineteen states have introduced or taken action on legislation or issued executive orders adopting the model legislation. Another six states are expected to consider such legislation soon.  The Conference of Mayors strongly encourages all mayors in states with a sales tax (particularly states with a local option sales tax) to contact your state legislators to urge them to support model sales tax simplifications legislation that will allow the state to participate in a multi-state arrangement to collect sales and use taxes on remote sales. The list below provides a status report on state action on model legislation.

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