Advisory Committee on Electronic Commerce Report to Congress April 2000 EXECUTIVE SUMMARY ONLY!!!! followed by list of Commissioners and Staff ========== Executive Summary The Advisory Commission on Electronic Commerce met in four in- person meetings: Williamsburg, Virginia; New York City, New York; San Francisco, California; and Dallas, Texas. At its final meeting in Dallas on March 20 and 21, 2000, the Commission voted on a number of proposals bearing on the subject of the Commission’s charter. Certain of those proposals received a 2/3rds vote and, pursuant to the statute, represent findings and recommendations of the Commission. Other proposals, including those pertaining to state sales and use taxes, received a majority vote of the Commissioners and are identified as such throughout the report. Under the terms of the statute, those proposals do not constitute formal findings or recommendations of the Commission. The domestic tax proposals, if implemented by Congress, would establish an environment that continues to foster innovation and technological advancement in the development of the Internet and electronic commerce (“e-commerce”) while, at the same time, recognizing the role of state and local governments to continue providing needed services to their citizens. The proposals, adopted by a majority of the Commissioners, are consistent with the belief that governments should keep the tax and administrative burden on consumers and businesses as low as possible. They are also consistent with the view that federal policies in this area should respect the sovereignty of sub-federal jurisdictions and interstate commerce. The best way to strike a balance between the national and state interests will be through earnest and open debate among all affected parties. In addressing whether and how the Internet should be subject to taxation, a major priority should be reducing or removing barriers to access to perhaps the most advanced and useful medium of communications and commerce yet devised. That imperative has infused the various access and telecommunications tax discussions in this proposal, which will, cumulatively, drive down the cost of connecting to the Internet and consequently increase the numbers of those who can afford to connect. The advent of e-commerce raises new challenges for traditional state and local tax systems. It should not be presumed that the collection of sales and use taxes on Internet transactions is an inevitability. There is, however, a need to begin a dialogue that will lead to the substantial simplification and reform of the current tax systems if they are to continue to remain viable in the 21 st century. Now is not the time to ignore the challenge of reform, and it is not the time for incremental adjustment. Rather, now is the time to take a hard look at state and local transaction taxes, to determine whether they can be restructured in light of technological change, and then to take action. These proposals are intended to enable all consumers, whether or not they make purchases on the Internet, to enjoy the benefits of a new, restructured sales and use tax system. The hallmark of the system should be simplicity, efficiency and fairness. Our system of federalism mandates that the burden of producing such a system falls on the states. The proposals adopted by a majority of the Commissioners suggest giving the states five years to simplify their state and local transaction tax systems in a manner which would equalize the burdens of tax collection for local and remote sellers. The system should not be more burdensome on a business that collects and remits taxes to several taxing jurisdictions than it is to a business that collects and remits taxes in a single taxing jurisdiction. By eliminating any disparate burden on interstate commerce, states will have a pathway toward a system that extends their collection of existing state taxes to remote sellers. In the interim, there should be several clarifications to remote sales tax collection duties that would benefit both state and local governments and vendors by drawing some “bright lines” for guidance. These guidelines would provide clarity, thereby reducing costly litigation and uncertainty and enabling equitable treatment of retailers and “e-tailers,” as well as consumers who do not have Internet access. In addition, the sale of certain products available in both digital and tangible forms should be exempt from sales tax during the moratorium period. No party in the debate has sought to increase tax revenues through more taxes. Therefore, it is appropriate for states whose overall sales and use tax revenue collections increase as a result of use tax collections on remote sales to make a substantial and proportional reduction in their overall sales tax rates, thus maintaining revenue neutrality in overall sales and use tax collections. The proposal will achieve these goals through the following five-part approach: 1. Substantially reducing the overall burden on consumers due to state and local sales taxes by radically simplifying state and local tax systems, and reducing the aggregate collection costs of all transactions, which will allow all sellers to pass on those cost savings to taxpayers; 2. Creating a simple and equitable system for state and local sales taxes that would impose equal obligations and costs on all sellers, local or remote, regardless of sales channel or technology utilized; 3. Addressing concerns regarding the digital divide and the regressive character of state and local transaction taxes by eliminating the disparate tax treatment of main street and Internet sales, banning taxes on Internet access and reducing overall transaction tax rates; 4. Eliminating the federal excise tax on communications services, simplifying state and local telecommunications taxes and eliminating multiple and discriminatory taxation of telecommunications services and property; and 5. Protecting the privacy of consumers by minimizing the disclosure of personal information for tax collection purposes. E-commerce raises new tax compliance and administrative issues for national income tax and consumption tax systems. An international perspective is necessary to address this subject since e-commerce potentially crosses national borders to a greater extent than other, traditional forms of doing business. Therefore, it is important for every nation to give serious consideration to the impact on its trading partners of any new or amended rules for taxation of e-commerce. In order to minimize the potential for double taxation, an international consensus for the taxation of e-commerce should be developed. The Organisation for Economic Co-operation and Development (“OECD”) is the appropriate forum to sponsor the required international dialogue, which will require input from the business community and non- OECD countries. The Advisory Commission on Electronic Commerce believes the Congress of the United States can facilitate the international dialogue by adopting the proposal described herein. The proposal receiving a majority vote of the Commissioners is based on the conclusion that existing, internationally accepted tax rules should be applied to e-commerce. No new taxes are required. In addition, the goals of simplification, neutrality, greater certainty, and avoidance of double taxation are equally significant. The Advisory Commission on Electronic Commerce was established pursuant to P.L. 105-277, Div C, Title XI Stat. 2681-719, and codified as 47 U.S.C.S. § 151 Sec. 1102 (H.R. 4328) (referred to herein as the “Internet Tax Freedom Act” or the “Act”). As set forth in the Act, the Commission’s statutory mandate is to study “federal, state and local, and international taxation and tariff treatment of transactions using the Internet and Internet access and other comparable intrastate, interstate or international sales activities.” [ 1 Internet Tax Freedom Act, 47 U.S.C. § 151, sec. 1102(g)(1998).] The Act requires the Commission to complete its study within 18 months and transmit its findings, including any legislative recommendations, to Congress. The Act directed Senate and House leadership to appoint 19 commissioners including: the Secretary of Commerce, the Secretary of the Treasury and the United States Trade Representative (or their respective delegates), eight representatives from state and local governments (including one from a state or local government that does not impose a sales tax, and one representative from a state that does not impose an income tax), and eight representatives from the e- commerce industry (including small businesses), telecommunications carriers, local retail business and consumer groups. [ 2 Internet Tax Freedom Act, 47 U.S.C. § 151, sec. 1102(a)(1998).] Formal Findings and Recommendations 1. Digital Divide The following items received more than 2/3rds (15) of the Commissioners’ support and are considered recommendations: *** Clarify federal welfare guidelines expressly to permit the states to spend Temporary Assistance to Needy Families Program (TANF) surpluses (unobligated balances) to provide needy families access to computers and the Internet, and to provide training in computers and Internet use. *** Encourage states and localities to partner with private technology companies to make computers and the Internet widely accessible for needy families, libraries, schools, and community centers and to train needy families how to use computers and the Internet. Incentives for these partnerships may include: *– federal and state tax credits and incentives for private technology companies that partner with state and local governments; and *– federal matching funds for state and local expenditures. *** Encourage the Administration and Congress to continue gathering data for empirical research that will inform federal, state and local policymakers on measures that will lead to the reduction, and eventual elimination, of the Digital Divide by empowering families in rural America and inner cities to participate in the Internet economy. 2. Privacy Implications of Internet Taxation The following items received more than 2/3rds (16) of the Commissioners’ support and are considered recommendations: *** Explore the privacy issues involved in the collection and administration of taxes on e-commerce, with special attention given to the costs that any new system of revenue collection may have upon other values that U.S. citizens hold dear, and the steps taken in systems developed to administer taxes on e- commerce to safeguard and secure personal information. *** Take great care in the crafting of any laws pertaining to online privacy (if any such laws are necessary), because policy missteps could endanger U.S. leadership in worldwide e-commerce. 3. International Taxes and Tariffs The following item received more than 2/3rds (18) of the Commissioners’ support and is considered a recommendation: *** Support implementing and making permanent a standstill on tariffs at the earliest possible date. Majority Policy Proposals 1. Sales and Use Taxes The following items received a majority (11) of the Commissioners’ support: *** For a period of five years, extend the current moratorium barring multiple and discriminatory taxation of e-commerce and prohibit taxation of sales of digitized goods and products and their non-digitized counterparts. *** Clarify which factors would not, in and of themselves, establish a seller’s physical presence in a state for purposes of determining whether a seller has sufficient nexus with that state to impose collection obligations. *** Encourage state and local governments to work with and through the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) in drafting a uniform sales and use tax act that would simplify state and local sales and use taxation policies so as to create and maintain parity of collection costs (net of vendor discounts) between remote sellers and comparable single-jurisdiction vendors that do not offer remote sales. *** Establish a new advisory commission responsible for oversight of the progress of NCCUSL’s efforts to create a uniform sales and use tax act. 2. Business Activity Taxes The following item received a majority (11) of the Commissioners’ support: *** Clarify the circumstances that determine whether a seller has sufficient nexus with a state to be required to meet business activity and income tax reporting and payment obligations of that state. 3. Internet Access The following item received a majority (11) of the Commissioners’ support: *** Make permanent the current moratorium on any transaction taxes on the sale of Internet access, including taxes that were grandfathered under the Internet Tax Freedom Act. 4. Taxation of Telecommunications Services and Providers The following items received a majority (11) of the Commissioners’ support: *** Eliminate the 3% federal excise tax on communications services. *** Eliminate excess tax burdens on telecommunications real, tangible and intangible property. *** Afford similar treatment of telecommunications infrastructure in states that exempt purchases of certain types of business equipment from sales and use taxes. *** Encourage state and local governments to work with and through NCCUSL in drafting a uniform telecommunications state and local excise tax act, within three years, that would require states to follow one of two simplified tax structure models. 5. International Taxes and Tariffs A. Tariffs The following item received a majority (11) of the Commissioners’ support: *** Support the formal, permanent extension of the World Trade Organization’s current moratorium on tariffs and duties for electronic transmissions. B. International Taxes on Goods and Services The following items received a majority (11) of the Commissioners’ support: *** Recognize the OECD’s leadership role in coordinating international dialogue concerning the taxation of e-commerce; affirm support for the principles of the OECD’s framework conditions for taxation of e- commerce; and support the OECD’s continued role as the appropriate forum for (1) fostering effective international dialogues concerning these issues; and (2) building international consensus. *** Encourage and support (including adequately funding) the U.S. Government’s efforts to further international dialogue concerning the taxation of e-commerce, which are consistent with the principles outlined above. *** Refrain from adopting legislative proposals affecting international transactions or activities that are inconsistent with the principles enumerated above. 6. The Need for Improved Knowledge of International Ramifications The following item received a majority (11) of the Commissioners’ support: *** Congress should increase its oversight of the international ramifications of domestic Internet commerce decisions. 6 The Commissioners closed their final, formal meeting with expressions of optimism that the process they began will result in a continued, national dialog about the impact of e-commerce on the nation and its states and its people. The Commission believes that its discussions have furthered public education and will provide an enduring legacy as Congress and the people continue to debate this most important series of issues. The Commissioners acknowledged that in the end, there was little disagreement among themselves. All of the Commissioners were pleased to have had the opportunity to serve in this capacity and believe that their efforts have elevated the examination of broader taxing issues on today’s and tomorrow’s agendas. ========== Commissioners The Honorable James S. Gilmore, III Chairman Governor, Commonwealth of Virginia Commission Staff Heather B. Rosenker, Executive Director Dianne Cannon Alan E. DeFend Valerie Rice Commission Counsel Wiley, Rein & Fielding Thomas B. Griffith, Esq. Kirk L. Jowers, Esq. The Honorable Dean F. Andal Chairman California Board of Equalization Mr. C. Michael Armstrong Chairman of the Board AT&T Mr. Joseph H. Guttentag Senior Advisor to the Assistant Secretary for Tax Policy U.S. Department of the Treasury The Honorable Paul C. Harris, Sr. Delegate Virginia House of Delegates The Honorable Delna L. Jones Commissioner Washington County, Oregon The Honorable Ron Kirk Mayor City of Dallas The Honorable Michael O. Leavitt Governor State of Utah Mr. Gene N. Lebrun National Conference of Commissioners on Uniform State Laws (President 1997-1999) The Honorable Gary Locke Governor State of Washington Mr. Grover G. Norquist President Americans for Tax Reform Mr. Robert T. Novick General Counsel U.S. Trade Representative Mr. Richard D. Parsons President Time Warner Inc. Mr. Andrew J. Pincus General Counsel U.S. Department of Commerce Mr. Robert W. Pittman President & Chief Operating Officer America Online, Inc. Mr. David S. Pottruck President & co-Chief Executive Officer Charles Schwab Corporation Mr. John W. Sidgmore Vice Chairman MCI Worldcom and Chairman UUNET Technologies Mr. Stanley S. Sokul Independent Consultant Association for Interactive Media Mr. Theodore W. Waitt Chairman Gateway, Inc.