Review of the ACEC Meeting in San Francisco, December 14-15, 1999

The Committee Members

The committee has three types of members:

3 representatives from the Federal Government, comprised of the Secretary of Commerce, the Secretary of the Treasury, and the United States Trade Representative;
8 representatives from State and local governments; and
8 representatives of eCommerce, telecommunications, local retail businesses, and consumer groups.

All of the members present were well spoken, thoughtful, reasonable, and earnest.

Prominent Individuals

James Gilmore, Governor of VA: Chairman of the Commission; a consummate politician, with his own agenda that he does give more than equal time to. His proposal is: 1) no sales taxes on "remote" sales (to avoid putting an Internet kiosk in the store); b) reduce the 3% federal excise tax on telecommunications to 1%, and c) use that 1% to reward states that "simplify" sales tax administration. This proposal is in the ballpark of the central themes that the Committee is wrangling with, namely, a) how to be fair and not onerous, b) the federal excise tax, and c) states simplifying or "harmonizing".
Dean Andal, Chairman of the CA Board of Equalization: appears to have the Chairman’s ear. Both of their proposals are compatible, so they support each other. His is to codify the Supreme Court case (Quill v S.D.) declaring that states cannot put an "unreasonable burden on remote sellers to collect use taxes" as well as clarify the definition of "nexus."
David Pottruck, CEO Charles Schwab: a thoughtful man who is well regarded. I could not determine where he stands, but he is often the voice of reason on the Committee.
Michael Leavitt, Governor of UT: represents the proposal from the NGA (Nat’l Governor’s Assoc) which wants a) simplification; and b) software provided to sellers at no cost. Collecting sales taxes is (of course) critical to states’ survival. This is the primary candidate under consideration, the other being the Chairman’s own proposal.
Ron Kirk, Mayor of Dallas: host of the final Committee meeting; a colorful man who more than once brought humor and practicality to the discussions.

Grover Norquist, President, Americans for Tax Reform: a liberal wanting to simplify the present system, as does everyone, but more along the lines of having no taxes at all.
Delna Jones, County Commissioner, Washington County, Oregon: since Oregon doesn’t have a sales tax, mostly doesn’t want the burden of "having to collect for all the other states."
Ted Waitt, CEO Gateway: characteristic of most businesses, wish to have no sales taxes.

No shows: Chairman of AT&T and the COO of AOL, Robert Pittman.

Review of Speakers

The sessions were grouped along four broad categories: International Tax & Tariff Issues; the various proposals submitted to the Committee; Affected Business Sector Representatives; the "Issues and Options" Paper.

International Tax & Tariff Issues

This was a distinguished panel with representatives from the OECD, EU, and WTO.

Organization of Economic Cooperation and Development (OECD), Andrew Marsland.

Goals: neutrality, fairness, efficiency, simplicity, certainty, and flexibility.
Existing tax rules are adequate and always evolving.
No tariffs, but taxes (VAT etc.) according to consumption, essentially same as today.
28 of 29 members have VAT, with only Canada having localized taxes.

Tax Policy at the EU, Michel Aujean (a smart guy!)

EU has a harmonized structure, no internal borders.
VAT is always applied at place of consumption, regardless of medium, but services are taxed at the source (supplier). This needs to change so both are consumption-based. Exported goods are not VAT’d since the consumption is outside the EU.
System needs to have a single place of registration for extra-EU sellers.
Amazon has subsidiary inside the EU to simplify business and tax compliance.
Sales tax rates are chosen by country with a minimum set for the whole EU (15%!) covering standardized product categories.

Competitive Enterprise Institute, Fred Smith, Washington D.C.

The Internet is a tremendous promise if we don’t rush in too quickly to tax—a frontier sector.
No taxation without representation! [a common cry against collecting use taxes]
Privacy is at risk from things like "digital money" etc. Anonymous creation of wealth is the greatest freedom and value of the Internet.
States don’t need these tax revenues. [this argument is made repeatedly that since state coffers are flush today therefore there is no need to collect sales taxes]

Robert Novick, US Trade Representative to WTO, ACEC member.

Duty-free cyberspace, continue moratorium.

Joseph Guttentag, US Treasury, ACEC member.

Agree with principals and work of the OECD—rely on existing systems and evolve before radically changing anything.

Q&A:

Primarily revolved around what should we do with differences in tax policy, such as if we don’t tax digitized goods and they tax consumption but rely on the seller to collect and remit

Various Proposals

Small Business Survival Committee, Sen. John Casek

Extend moratorium and ban new taxes
"taxation might reduce the number of online buyers by 24%"
"estimate of the cost for small business to collect sales taxes: 87% of the tax itself."
"neither states or main street are losing revenue due to these inequities."

E-Freedom Coalition, Adam Thierer

Eliminate telecommunications taxes
Clarify "nexus" based on clear physical presence
"NGA proposal would create a de facto federal cartel, which is bad"
"all states have to do is change to an origin basis since remote enforcement is unconstitutional"

Dean Andal

Quill has repeatedly been challenged and not overturned, but it needs to be codified and clarified so there is less debate about such things as "nexus". Proposal to base on "substantial physical presence and not any of webpages, logos, money transferred, trademarks, or affiliations."
"CA is the most web-friendly yet retail sales tax receipts are up 10%, along with excess receipt for capital gains & income tax."
"Shipping costs far out shadow any differentials in tax rates and laws."
"need a 4-R type of act (orig. for railroads) extended to telecommunications to equalize (reduce) the tax from now several times other tax rates.

Prohibition of Discriminatory Ad Valorem Taxation on Interstate Telecommunications

Everyone agrees that the 3% federal excise tax and state and local taxation of telecommunications is ridiculous in this now unregulated environment.

Global Crossing, a huge web hosting company based in Bermuda

These people were laughed at because they were asking for a tax exemption on everything used to build and operate web-hosting centers since "they are critical to the growth of the Internet."

NGA’s Streamlined Sales Tax System, Gov. Janklow, S.D.

This guy was a real highlight. S.D. has no income tax, only sales tax, so it’s literally critical to their survival. They really need to be allowed to collect use taxes for survival, and the fed has the constitutional right to regulate interstate commerce and should do so. In fact, Quill invited the fed to do so.
As many sales go online and untaxed, the remaining products sold locally will tend to be more of the essentials, and for those who can’t afford Internet access, resulting in a regressive tax system.
He sparked animosity with Grover Norquist by suggesting that "if necessary, they’ll start stopping little brown trucks at the border."
TN rep. Matt Kisber reiterated the NGA’s proposal for a "zero burden system": status quo on nexus, Trusted Third Parties, voluntary, privacy, state-funded.
Cabella (catalog) has two businesses! The second to avoid nexus in other states.

John Peha, CMU

Non-discriminatory tax policy
Criteria: enforceability (audit trail), privacy, and efficiency
Trusted Third Parties are needed to corroborate merchant records, in the form of accredited "notifiers" and "verifiers"—to timestamp and tamperproof records between merchants and TTP’s.

Taxware Int’l, Dan Sullivan

Modules: VeraZIP, calc, nexus, exemptions, ReMIT. Almost exactly the same as ours but they don’t have EDI (electronic) interface with states—they require states to use their ReMIT system to receive filings!
Transaction Tax Server (which they don’t say means all tax receipts flow through them)

Charles McLure, Hoover Institute

No reason to exempt eCommerce
Substantial simplification via standardization required
Consumption-based taxation, exempt sales to businesses and exports
When consumer location is unidentifiable, assign a fixed rate that is distributed to states according to consumption levels.
Vendor discounts to collect and remit taxes.

NARDA (North American Retail Dealers), James Goldberg

"Clicks and Mortars" are forced to create parallel business entities to avoid nexus
Supreme Court said only Congress can legislate tax collection
Simplification and standardization
Single remote rate per state; single remittance and administration per state.
Program to educate consumers on their obligations; MN does so on their income tax returns.
States should start collaborating to simplify and standardize

PricewaterhouseCooper: No Net Net Tax

Enforce use taxes while reducing local rates to result in revenue neutrality. Legislate the former in exchange for a limit on the latter (raising other rates).

COST (Committee On State Taxation), Diann Smith

Must be voluntary, for a defined period, say 3 years, see how it goes
Need significant incentives to get remote sellers to participate: simplification and discounts.
Fed deduction for consumer use taxes.

ECommerce Coalition, Ernst & Young, Joseph Crosby

No taxes on Internet access or discriminatory taxes on telecommunications
Simplification is the only viable solution, state-led uniform classifications
Warning about how "Taxware’s last slide implies all taxes flow through them"
Vendor has to participate in any solution and be reimbursed for any costs.
NGA’s proposal would have broad state and local support.

Q&A

Affected Business Sector Representatives

Int’l Council of Shopping Centers, Peter Lowy

Same taxes for everybody, mentioned ATRACS and Taxware already used everywhere

WalMart, David Bullington

De minimis ratios are necessary
States need help simplifying—won’t do it themselves. States that don’t should pay a higher collection allowance.

Federated Dept. Stores, Frank Julian

Uniform product codes

Hewlett Packard, Dan Kostenbauder

Big problem! Gilmore and Norquist are using a misquote from him to show how prohibitive it would be for small businesses to comply: "HP spent $2M last year on sales tax compliance, and a medium sized business would need to spend $100K to $500K to adapt their business system for compliance." This has nothing to do with the cost for a small business to subscribe to such a service.

Issues and Options Paper

This document frames the issues and the options in front of the committee on which to vote. Assuming you’ve read: http://www.ecommercecommission.org/document/issuesPO.pdf, following is a summary of how the committee is leaning on the various issues:

International Tax & Tariff Issues

All agree that there should be no tariffs or taxes on Internet transactions.

Tax Treatment of Internet Access

All agree that Internet access should not be taxed.

Tax Treatment of Telecommunications Service Providers

All agree that the current tax structure is outdated and onerous.

Application of Transaction Taxes to Sales Conducted Through the Internet

The Committee is still far from consensus on this most contentious issue. Their primary concerns are:

Fairness—taxing or not taxing based on the method or medium of the transaction.
Not burdening remote sellers. Many suggested not only not costing anything to the vendor, but giving a discount or allowance for collecting and filing taxes.
All agree on simplification and harmonizing on things like product categorizations.
Consumer Privacy

Impact on Business Activity Taxes

Quill and "nexus"—given a difference in tax treatment, where and how do you draw the line between local and remote sales when the Internet so blurs the distinction.

Redress Mechanism for Imposition of Unconstitutional State and Local Taxes
The "Digital Divide"

Summary

The NGA’s proposal (taxes remitted through Trusted Third Parties with no cost to vendors) seems to have the most support, with Gilmore’s proposal close behind (or maybe that’s just because no one contradicts him in public). Taxation is, therefore I think, inevitable. Simplification and harmonization is inevitable. State sovereignty will be protected. The only question is whether the administration of tax collection and remittance will remain in the private sector or made public.