STC's Proposal to the Advisory Commission on Electronic Commerce www.ecommercecommission.org Clifford A. Farmer 1125 Red Oak Dr. Boothwyn, PA 19061 (610) 558-9423 farmerca@theSTC.com   Gregory M. McCauley, Esq. 392 Baltimore Pike Chadds Ford, PA 19317 (610) 459-5900 mccaulgm@theSTC.com November 12, 1999 theSTC.com

The Sales Tax Clearinghouse

The Sales Tax Clearinghouse (STC) is an existing business with a simple solution for the dilemma that transactions conducted over the Internet seem to pose.  STC provides software and services to merchants to facilitate the calculation, filing, and remittance of sales and use taxes.  STC views the eCommerce model as essentially the same as today's " point of sale" (POS) retail model with just the added complexity of having to consider a multiplicity of taxing authorities rather than just the few that may govern a single location at the POS.  This is a simple computational extension that should not require us to redefine how business is conducted the world over, nor should it require any new legislation, rather, all that is needed is to comply with the existing regulations set forth by state and local municipalities.

Highlights

Our proposal is simply to facilitate the filing and remitting of sales and use taxes without passage of new legislation or taxes or changes to normal business operations.  This has the following benefits:

• Minimal impact to the current business model.
• Retention of the constitutional right of states to implement taxes within its borders.
• No new legislation or taxes, just the enforcement of existing sales and use taxes.
• No loss of the audit trail between the merchant and the taxing authorities.

Minimal Change to Current Business Model

STC's proposal minimally impacts today's business model, while providing a solution for compliance with a multiplicity of taxing authorities.  To see the minimal impact of the proposal, it is necessary to understand the current business and eCommerce models utilized by the retail sales industry.

POS Retailing Model

In the classic retailing model, taxes are computed by the merchant at the POS.  The total amount, along with the customer’s credit card number, is passed through a credit card charging service (CCCS) to a credit card company (CCCo).  The merchant is reimbursed almost immediately, minus a service charge ranging from 1.5% to 2.75%.  Periodically, the merchant then files and remits sales taxes to the appropriate taxing authorities (TA’s).

eCommerce Model

In the eCommerce model (today), the sales tax is completely removed from the picture, but everything else is essentially the same.  An important distinction is that, on most websites, the customer is passed over to the CCCS’s website, utilizing a different server, to enter the credit card information.  The merchant only passes over the amount of the purchase.  The CCCS acts as the card swipe machine found at a retail merchant’s POS.

STC’s eCommerce Model

With STC’s proposal, the merchant computes the sales taxes and passes the combined amount on to the CCCS to be charged to the customer.  Everything between the merchant, the customer, the CCCS, and the CCCo remain the same.  The sales taxes appear as an additional line item on the customer’s order.  The merchant then posts the transaction with a service such as STC which will perform every function relating to the licensing, filing, and remitting of the sales taxes on behalf of the merchant.

One key benefit of this proposal is that merchants can elect to fulfill their own tax obligations or they may choose, for cost savings, to subscribe to a clearinghouse service such as STC.  Most merchants today already collect sales taxes for their locality, and some also do so for their interstate sales.  With clearinghouse services, smaller businesses will also be able conduct interstate sales just like they do today for credit card charging.

Another key benefit is that the relationship, the audit trail, and the accountability between the merchant and the taxing authorities remains intact.  All filings come from a single source: either the merchant itself or a clearinghouse service acting on its behalf.  Existing regulations specify that the merchants are the obligors to the taxing authorities and this is maintained by our proposal.

Finally, there is an added benefit to the merchants-taxing authorities often have dollar thresholds below which merchants are not required to remit taxes on purchases, and merchants with few sales in many of these localities will be able to just keep the sales or use taxes collected therein.

No New Taxes or Legislation

This proposal purposefully works within the existing business model, minimally impacting merchants, consumers, and taxing authorities, while retaining the rights and obligations of all.

The best solutions lie in the private sector where competition will yield a range of affordable solutions for the wide range of budgets and needs.

Sovereignty of States and Local Taxing Authorities

This is a key constitutional right that is upheld by our proposal, for state and local governments to implement taxation within their borders as they see fit.  Most taxing authorities are currently being deprived of their due taxes as eCommerce allows merchants and consumers to so easily reach beyond their own domains, and this proposal restores their ability to receive their uncollected funds.

Scalability to the International Level

This proposal works equally well at any level of taxing authority, from local municipalities to foreign countries.  Tax obligations may be applied either on the source or destination, or both, in the case of a foreign shipper to the US.  In all cases, the merchant simply charges the consumer with all the relevant taxes and remits those taxes to the appropriate authorities.  As has always been the case, consumers in different localities will experience varying degrees of taxation, but it also always has been the right of each governing body to levy taxes as they see fit, as well as for citizens to move.

Specific Recommendations

We urge the committee to make just a few simple recommendations:

1. Commence mandatory compliance with existing sales and use tax regulations beginning October 1, 2000.  Compliance, without any new legislation, would be essentially voluntary, but backed by the threat of an audit with ensuing fines and interest.  Any merchant that conducts business on the Internet without charging appropriate sales taxes would be an easy target for any municipality to issue an audit, the results of which would be available to any other taxing authority looking to collect its due taxes.  Any business found in violation of their tax compliance would have to pay additional fines and interest and probable legal costs, which would surely prompt most legitimate businesses to comply voluntarily.  The technology, software, and services exist today for merchants to commence compliance almost immediately.
   
   
2. Encourage all taxing authorities to use a universal merchant identification number. The single largest burden for either a merchant or a clearinghouse service is having to maintain hundreds of individual relationships with all the taxing authorities each with its own identification number.  The best recommendation this body can make is to suggest that all these taxing authorities begin to use the same universal identification number for each merchant.  The best candidate for such a universal number would be the federal EIN.
   
   
3. Urge the U.S. Postal Service to align ZIP code boundaries with those of enclosing taxing authorities such as townships, parishes, counties, and states.
   
   
4. Urge states to agree on a common list of categorization codes for exceptions to the general retail rates such as food, machinery, and lodging.

Criteria for Evaluation of Alternative Proposals