 Second Meeting:
Transcript of September 15
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7 ADVISORY COMMISSION ON ELECTRONIC COMMERCE
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18 New York, New York
19 September 15, 1999
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1 P R O C E E D I N G S
2 CHAIRMAN GILMORE: Welcome to the second
3 full meeting of the Advisory Commission on
4 Electronic Commerce here in New York City.
5 It's a pleasure to be with all of you, and
6 I'm pleased to introduce Brian Horey. Where
7 is Brian? Is he here in the room? Yes, sir.
8 A member of the New York New Media Association.
9 I'm going to call on him in just a moment for
10 some opening remarks, but first let me say a
11 few words if I could.
12 We had our opening session
13 yesterday in which we had an opportunity to
14 deal with some of the telecommunications
15 access issues, and I think we had a good and
16 fair discussion under the format that we have
17 been working, and I'm pretty happy about
18 that. Just to sum up where we have been, the
19 first meeting of course was held in
20 Williamsburg, Virginia. In that meeting we
21 went through many of the organizational
22 issues at length. We had the opportunity to
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1 listen to a broad range of policy data
2 together with written materials which we have
3 had now for several months, and that laid a
4 foundation.
5 Since that time we've had a work
6 plan subcommittee headed by David Pottruck
7 who is here with us today. David, thank you
8 very much for your work on that. Two
9 subcommittee meetings were held by
10 teleconference very successfully. The work
11 plan has come forward which has defined
12 what we're doing here today.
13 We've also had an extensive work
14 going on by the financing subcommittee headed
15 by Mike Armstrong. That I think has made
16 considerable progress, and we're very hopeful
17 that the Congress will come forward and
18 appropriate for us the funds that we need to
19 keep going.
20 Otherwise, we will do what we have
21 been doing, and that is rely upon the good
22 offices of certain members of the Commission
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1 who have come forward to keep us moving
2 ahead. As I said yesterday afternoon, we had
3 the opportunity to deal with the issues on
4 access and telecommunications, access type of
5 issues. There was a full discussion.
6 Now, the format that we have agreed
7 to under our work plan is to ask our
8 presenters to present in 5 minutes. The
9 reason of this is that it is the will of this
10 Commission that we do most of our business,
11 or virtually all of our business by way of
12 interaction with you and with each other so
13 that we can argue back and forth, we can
14 discuss the issues in a debate type of
15 fashion, and particularly utilize our
16 speakers in a capacity that I think is
17 constructive.
18 Now, we have that process that is
19 available. I might mention that everyone in
20 the room is aware that we have a major
21 hurricane that is approaching the coast of
22 the United States. I in Virginia have
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1 declared a disaster declaration there, a
2 state of emergency, if you will. Excuse me.
3 Not a disaster declaration. State of
4 emergency in preparation for this storm which
5 is already beginning to create some rain in
6 the Commonwealth, not to mention the states
7 south of us which is a matter of some
8 concern.
9 Many of the Commissioners have
10 expressed to me that they may have to get out
11 in time to be able to get back down into the
12 Washington area, the Virginia area, and so
13 on, and this is a significant issue for us
14 today and we should remember that as we go
15 on.
16 Just a couple of housekeeping
17 things. I will call time pretty close on
18 the 5 minutes as we go through the day, and
19 that maximizes the opportunity for the debate
20 format to go on. We would ask that each
21 person identify themselves. This is being
22 Webcast and transcribed, and we would ask
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1 that each person that speaks here today
2 identify themselves for the record. I know
3 that when we get into the give and take it's
4 hard for us, the Commissioners to do that,
5 but do the best you can. Meanwhile, the
6 presenters should always give us your name
7 and who you're with before you proceed on and
8 that way we have that.
9 Just a small little housekeeping
10 thing, if everybody can remember to turn
11 these off when you're done speaking, it'll
12 help a lot with the Webcast and with other
13 types of the difficulties of the Webcast
14 efforts that we're working on. These are
15 small matters, but they help us all a great
16 deal.
17 I want to thank the Commission. I
18 certainly want to express my appreciation to
19 the fine owners of this building here for
20 providing us the space for the eCommerce
21 Commission to meet. Now we shall turn our
22 attention to Mr. Brian Horey who is a board
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1 member of the New York New Media Association, and
2 one of our hosts for this meeting for some
3 opening remarks. Mr. Horey?
4 MR. HOREY: Thank you. On behalf
5 of the New York New Media Association I would
6 like to welcome Governor Gilmore, the members
7 of the Commission, and our distinguished
8 speakers and guests to Silicon Alley.
9 For those of you watching and
10 listening in cyberspace, we are in real space
11 at the Global Digital Community Sand Box
12 at the New York Information
13 Technology Center at 55 Broad Street in Lower
14 Manhattan.
15 We are pleased that these important
16 topics are being debated here in New York and
17 feel that it quite appropriate that these
18 discussions take place here. In the last 5
19 year, New York has emerged as a leading
20 center of Internet activity. Silicon Alley
21 is now home to over 2,000 new media companies
22 with an employee base approaching 100,000
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1 people, and e-commerce is the primary focus
2 of many of these companies and their
3 employees. Silicon Alley is showing
4 unmistakable signs of success.
5 In the last year, New York has had
6 more Internet-related IPOs than any other
7 city in the country, and these newly public
8 companies have created over $35 billion of
9 wealth in the process. The rate of new media
10 company formation in New York has accelerated
11 in the last year, ensuring a steady stream of
12 future IPO prospects down the road.
13 While the entrepreneurs of New York
14 have been busy building their companies, the
15 State of New York has taken a leadership
16 position in the area of Internet taxation.
17 Or I should say, the lack thereof. Thanks to
18 the efforts of Governor Pataki and the State
19 Legislature, New York was the first state to
20 create a sales tax exemption specifically for
21 ISP services.
22 Additional tax incentives for the
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1 new media industry were enacted this year,
2 putting New York in the vanguard of
3 legislative efforts to support the industry.
4 The New York New Media Association
5 is very pleased to play host for these
6 hearings. The association was formed a
7 little over 5 years ago to foster the growth
8 of the new media industry in New York and to
9 serve the entrepreneurs and creative and
10 business professionals that comprise the new
11 media community here. From an initial
12 gathering of 20 people at our first cybersuds
13 event, the association has grown to become
14 the largest new media trade association in
15 the country with over 5,200 members,
16 representing 1,900 companies, and Blue Chip
17 corporate sponsors including IBM, Sun Micro
18 Systems, Intel, Lucent, and Microsoft --
19 supports a wide range of programs including
20 panel discussions, an annual trade show, an
21 annual venture capital conference, an angel
22 investor program, internships, industry
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1 surveys, state and local lobbying, and work
2 shops for entrepreneurs. You can learn more
3 about NYNMA at www.nynma.org.
4 Let me conclude by thanking on
5 behalf of Silicon Alley the members of the
6 Commission and their staff for taking on the
7 important issues surrounding electronic
8 commerce and taxation. Your deliberations
9 and conclusions will have a lasting effect on
10 the industry, and we look forward to
11 supporting your efforts to create a robust
12 e-commerce marketplace. Thank you, Governor.
13 CHAIRMAN GILMORE: Thank you, Mr. Horey.
14 As I've said, this meeting is Webcast and
15 transcribed. We have microphones throughout
16 the room for people who are presenters or any
17 experts that want to speak. You just have to
18 remember to get to a microphone at all times
19 when you're speaking.
20 Today we are listening to
21 presentations on the central issue
22 surrounding the Commission; by no means not
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1 the only issue, but certainly a central
2 issue, and that is regarding local, state,
3 and federal tax issues associated with
4 electronic commerce. After the presentations
5 we'll being our deliberations and questioning
6 of the speakers and members of the expert
7 panel.
8 This ought to go until about 3:30
9 this afternoon, including a break in the
10 middle for about an hour and a half for
11 lunch. Following that topic, the Commission
12 will hear from speakers concerning
13 international taxes and tariff issues, and
14 there are some resolutions involved with that
15 as well. My best guess is that that may not
16 take the full time, and that's considering
17 that we have to get out because of the storm
18 situation.
19 That's not necessarily a bad thing,
20 and we find an opportunity I think to address
21 that in more depth at a later time. We have
22 limited presenters on that issue anyway.
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1 So, we're I think prepared to
2 proceed. We have many interesting and
3 knowledgeable speakers who are here today who
4 will make presentations and talk with us. We
5 would ask the speakers, when we get through
6 the speakers, we would you go stand by nearby
7 though. We have more speakers on this issue
8 than we typically would, and more have been
9 offered by members of the panel than were on
10 any of the other issues.
11 So, we have broadened this out
12 considerably, and we would ask you all to
13 stand by nearby in case there are questions
14 to be had from the Commission after your
15 presentations.
16 We are interested not only in
17 hearing from as many organizations as
18 possible, but also of course debating and
19 discussion of these issues among ourselves.
20 Following the speakers, we'll open up the
21 discussion for deliberation just as we did
22 yesterday. I thought it was a format, ladies
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1 and gentlemen, that worked pretty well
2 yesterday.
3 We'll break this into several
4 panels because of space concerns, of course.
5 The first panel that is here with us today is
6 Charles Bayless Dan Bucks, Kaye Caldwell, and
7 Harley Duncan. We'll begin with Mr. Bayless.
8 I understand you are the president and CEO
9 of Illinova Power. Is that correct?
10 MR. BAYLESS: Yes, sir. That is
11 correct.
12 CHAIRMAN GILMORE: Please proceed.
13 MR. BAYLESS: Thank you. I have a
14 presentation which I hope will be appearing
15 on the screens in just a minute. The main
16 purpose of my topic today is to tell you that
17 there are many industries out there that are
18 not what are normally considered e-commerce
19 industries -- beginning to explode into
20 electronic commerce in the next couple of
21 years.
22 On the way down here I just was
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1 reading a couple of magazines. I always
2 throw my magazines under the desk and read
3 them on airplanes. "Utility Business," the
4 lead article, "The Approaching Internet Tidal
5 Wave": "By the year 2003, only one other
6 major sector of the economy, computers and
7 electronics, will be more Internet dependent
8 than utilities." "American Gas," two
9 articles, one entitled, "The Mighty Mouse,"
10 "The Internet now offers natural gas
11 customers a new way to pay their bills." So,
12 our industry is going to explode.
13 Historically, our industry was made
14 up of four segments: generation;
15 transmission; distribution; and customer
16 service. Two of these are being deregulated,
17 generation and customer service. Customers
18 will have the opportunity to choose their
19 generation supplier, and local facilities
20 will still perform transmission and
21 distribution. Now, this is going to lead to
22 Internet -- it's one of those unintended
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1 consequences, but it will. Electricity is
2 the ultimate commodity. It is totally
3 indifferentiated. If the president of
4 Consolidated Edison were here today, he could
5 not tell you where the electricity in this
6 building is coming from. It is coming from
7 every supplier in the Eastern United States.
8 The transmission system is like a
9 large lake. There are a couple thousand
10 electric plants pouring electric into the
11 lake; there are millions of customers taking
12 electric out of the lake. You cannot tell
13 which water or in this case electric
14 molecules are going to which customer. It's
15 totally indifferentiated. It goes into a
16 common carrier, and who knows what comes out
17 the other end.
18 All we can do is an accounting
19 treatment that we call ACE. ACE stands for
20 area control error. It's really a fairly
21 simple concept. We put a boundary around our
22 service territory and every transmission line
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1 that come in, we meter it, and we meter
2 everything. We monitor about 2,000 data
3 points a second to look at ACE. We take our
4 generation plus our imports, that's what
5 we've got available.
6 We support from that our load, our
7 losses, our exports. That's what we're
8 using. They better be equal. As long as
9 every utility keeps ACE equal, then the
10 system is balanced.
11 We can buy power from New York. If
12 we buy power from New York, Con Ed simply
13 raises their generation 100 megawatts and
14 their raise their exports 100. The PJM,
15 Pennsylvania, Jersey, Maryland, raises their
16 imports 100, raises their exports, 100.
17 Everybody does that down the way.
18 It finally gets to Illinois. We've
19 got our 100. There aren't line losses. Did
20 we actually get that power? No. No way. No
21 one knows where the power went, but it's
22 accounted for that way.
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1 Now, you notice in there that I
2 said load. You notice that blue dot. That's
3 where the Internet comes in. Right now we
4 measure load at major substations, and we may
5 measure load going out of a substation and
6 there may be 10,000 customers on that line,
7 but they're all hours. So, we can measure
8 that one load point. At Illinois Power we
9 only monitor about 800 load points
10 for 550,000 customers. You can see that in
11 the next graph, that pink dot. That's all we
12 have to do is measure there.
13 In this graph, I've shown that new
14 energy ventures, Con Ed, Duke -- we can no
15 longer measure at the pink dot. We now have
16 to go right to the customer to measure the
17 load to see what every person is using. So
18 they have a computer system. We are
19 currently in the process of installing
20 real-time reporting meters that will report
21 back every 15 minutes to Illinois Power what
22 every customer is using.
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1 People are using Internet for this.
2 NEV uses Internet. They're using radio;
3 they're using telephone; they're using
4 anything you can think of. One that NEV, for
5 instance, new energy ventures data gets back
6 to our computer, we will have to aggregate
7 that and send the packet to NEV to say here's
8 what you're using in our territory at this
9 time. Then they have to schedule that much
10 in so that they have enough power in our
11 territory.
12 You'll notice I've drawn the
13 packets differently. Everybody wants
14 different information so we're going to have
15 to go to something like XML so we can tag the
16 data and say this is first name, this is last
17 name, we want this, you want that, here it
18 is.
19 So once this connection is made,
20 then it's a two-way connection. The next
21 step which many are already doing is that a
22 customer in Montana for instance will be able
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1 to log onto a supplier's server, Duke in
2 North Carolina, and say that looks good.
3 I'll buy that 100 megawatts or I'll buy
4 that 10 megawatts or whatever.
5 The Duke computer in North Carolina
6 will then tell the local utility in Montana
7 this is my customer. I'm selling at 100
8 megawatts. You note that in your ACE to keep
9 track of it, and we're going to be getting
10 hundreds of such messages. The local utility
11 in Montana will do that.
12 They'll also notify the existing
13 supplier, I'm taking over, you're out. Sort
14 of like if AT&T/MCI. There has to be a
15 cutoff point so that they'll know when to
16 stop reading the meter every 15 minutes for
17 Duke.
18 CHAIRMAN GILMORE: Mr. Bayless, I think
19 this is it. But what we'll do is come back
20 to you for some questions and answers and go
21 ahead and pursue this a little bit further.
22 MR. BAYLESS: Thank you.
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1 CHAIRMAN GILMORE: But we appreciate
2 very much your insight.
3 MR. BAYLESS: Thank you.
4 CHAIRMAN GILMORE: The second speaker is
5 Mr. Dan Bucks. He is the director of the
6 Multi-State Tax Commission. Appreciate your
7 initial presentation before Q&A, Mr. Bucks.
8 MR. BUCKS: Mister Chairman and
9 members of the Commission, it is indeed a
10 pleasure and an honor to be here. I want to
11 thank you very much for this opportunity.
12 The issue of the sales and use tax collection
13 on remote sales at the time of sale has been
14 a matter of controversy and conflict for
15 over 40 years.
16 If you look back at this period of
17 time which stretches over really a fifth of
18 this nation's history, you can think about
19 the other kinds of conflicts that have been
20 resolved in this period of time.
21 President Nixon went to China, and
22 today China is a major trading partner. The
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1 Cold War is over, the Berlin Wall fell, and
2 Germany was reunited; and Israel has signed
3 peace treaties with Egypt and Jordan and the
4 Palestinians; and yet we're here in the
5 United States in this period of time still
6 arguing about whether or not the sales and
7 use tax will be collected on remote sales at
8 the time that the sales are made. It's time
9 to bring this conflict to an end, and it's
10 possible to bring this conflict to an end,
11 and this Commission, your Commission, can
12 play a critical role in finally bringing
13 this 40-year battle to a close.
14 Now, the costs of conflict have
15 been very high. It's included local
16 businesses closed because of unfair
17 competition from those who do not collect the
18 tax. It includes public dollars spent on tax
19 audits and litigation and costly after-sale
20 methods of collecting use taxes. It includes
21 money spent by remote sellers on endless
22 legal advice and limitations on their
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1 business flexibility in efforts to try their
2 way through NEXUS mind fields so that they
3 don't have to collect the tax. It includes
4 reduced customer satisfaction because
5 businesses restrict the way they serve
6 consumers, again, to avoid the taxes.
7 These costs have been high, but
8 they will get higher still if the problem is
9 not resolved. The costs won't rise so much
10 in the next couple of years, but out there
11 further, 5, 10, 12 years out, if e-commerce
12 sales continue to grow and if they begin to
13 erode the sales and use tax base, states are
14 going to be faced with difficult choices.
15 Now, please remember that the sales
16 tax raises a lot of revenue. The amount of
17 state sales taxes alone is nearly equal to
18 all state aid to elementary and secondary
19 education, about 93 percent in 1997. It
20 exceeds the total amount spent by states on
21 higher education.
22 It's two-and-a-half times that
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1 which has been spent on roads and highways by
2 states. So, you can a measure of the size of
3 this tax. If it begins to falter, states
4 besides being faced with choices about
5 cutting services may also be looking at
6 shifting taxes to production taxes on
7 business income or property taxes that
8 disproportionately affect certain business
9 sectors such as manufacturing and natural
10 resource sectors that require high physical
11 capital inputs.
12 The costs are going to rise if this
13 problem is not solved, and this Commission
14 though can play a critical role in bringing
15 the conflict to an end and can play the role
16 of peacemaker. I suggest you can do so in
17 very simple ways: By following a strategy, a
18 general approach, of asking the warring
19 parties here to resolve the conflict on the
20 basis of goals that you set for those
21 parties.
22 I would suggest in particular, and
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1 this could be part of a resolution that,
2 number one, you declare both sides to be
3 right. It's not fair that the tax is not
4 collected on sales at the time of sale. It's
5 not fair to the local business. So, that
6 side is right. The other side is also right,
7 that it costs too much under current
8 arrangements and it's too burdensome to
9 collect the tax on remote sales.
10 So, what is needed is a system of
11 tax collection that places minimal burden, if
12 any burden at all, on the remote seller,
13 which leads to the second step: Ask state
14 and local officials to develop a plan
15 precisely to meet that goal, to collect the
16 tax without placing a burden on remote
17 sellers.
18 Third, ask technology companies to
19 assist state and local officials in
20 developing that plan if state and local
21 officials ask that it be done. Fourth, the
22 further steps will fall into place after the
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1 plan is developed, because I think that there
2 are fair-minded people in both the public and
3 private sectors who will support the kind of
4 plan that meets the goal of collecting the
5 tax at the time of sale without placing a
6 burden on remote sellers.
7 The plan will be a combination of
8 advanced technology. There's already a
9 system like this operating in Europe
10 developed by a major U.S. Corporation. It
11 will be a combination of advanced technology
12 of certain strategic simplifications in state
13 and local taxes combined with a willingness
14 by state and local governments to pay for the
15 cost of collection. That's the outlines of
16 the solution, and the leader though for this
17 would rest with the Commission. Thank you
18 very much for the opportunity to address you.
19 CHAIRMAN GILMORE: Mr. Bucks, thank you
20 very much, and we'll be coming back to you
21 also in a little while I think to examine
22 some of those premises. We appreciate it.
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1 The next person who is going to speak to us
2 is Kaye Caldwell of CommerceNet.
3 Ms. Caldwell, thank you very much for being
4 here.
5 MS. CALDWELL: Thank you very much.
6 I certainly appreciate this opportunity to
7 present our views on this subject.
8 CommerceNet is a nonprofit organization of
9 about 200 companies with the goal of
10 promoting the growth of electronic commerce.
11 CommerceNet's written comments which I think
12 you have either before you or in the
13 materials somewhere are much more extensive,
14 but today I'd like to focus on the need to
15 solve our state and local tax collection
16 problems without subjecting millions of small
17 and medium businesses to thousands of tax
18 collecting jurisdictions.
19 Today I'm hearing this week that
20 over half U.S. small businesses are now on
21 the Internet in some form or another.
22 Both history and recent events have
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1 shown that when states can discriminate
2 against interstate commerce, they'll do it.
3 In fact, it was the extensive array of state
4 lawyers that arose under the Articles of
5 Confederation, not 40 years ago, but 225
6 years ago, that was the motivation for
7 including the Commerce Clause in the U.S.
8 Constitution.
9 More recently, when states have
10 been granted the right to regulate certain
11 areas of interstate commerce, they've
12 continued to create both taxed-based and
13 nontax trade barriers. Details of these
14 barriers can be found in our written comments
15 and in the documents that are cited in those
16 comments.
17 So, the real issue before the
18 Commission is whether or not this country
19 should continue to ensure the existence of a
20 robust national marketplace accessible by all
21 businesses and consumers alike or, rather,
22 instead, we will now allow the states to
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1 impose protectionist tax systems that
2 discriminate against interstate commerce.
3 Even today, multi-state taxpayers
4 are routinely subjected to unconstitutional
5 discriminatory taxes for which there is
6 really no effective remedy except perhaps 10
7 or 20 years of litigation, all the way to the
8 U.S. Supreme Court.
9 It would be extremely unwise to
10 subject the millions of small and medium
11 businesses in the new Internet marketplace to
12 taxing jurisdictions where they have no
13 governmental representation.
14 Furthermore, if we require every
15 business in the United States to register as
16 a tax collector in every state and local
17 jurisdiction, there is nothing to stop those
18 jurisdictions from imposing all kinds of
19 additional taxes on them.
20 Instead of abandoning our national
21 marketplace to the whims of the states,
22 Congress should protect our national
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1 marketplace by taking three steps. First of
2 all, Congress should provide a timely and
3 effective mechanism for redress for
4 multi-state taxpayers that have
5 unconstitutional taxes imposed on them.
6 There are several suggested mechanisms for
7 doing this in our written comments.
8 Secondly, in 1998 Congress
9 strengthened the role of the national
10 taxpayer advocate within the IRS. It may be
11 time to create a position in the federal
12 government of a multi-state taxpayer advocate
13 to provide for federal oversight of state tax
14 policies that affect interstate commerce.
15 Finally, Congress should redirect
16 the states to a workable solution for the
17 collection of use taxes on transactions in
18 interstate commerce by making it clear that
19 the states will not be allowed to impose tax
20 collection obligations extraterritorially.
21 Fortunately, the Commission has before it an
22 excellent proposal by Commissioner Andal that
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1 would redirect the states to find a workable
2 solution for the collection of these use
3 taxes.
4 Mr. Andal's proposal would not
5 prevent the states from imposing use taxes on
6 transactions in interstate commerce. It
7 would merely require the states to find other
8 ways of collecting those taxes besides
9 imposing tax collections on businesses that
10 have no governmental representation in their
11 jurisdiction.
12 While there are several possible
13 mechanisms that the states could use, one of
14 them has already been proven to work. That
15 mechanism is that the states could collect
16 sales taxes on all the retail sales that take
17 place within their borders regardless of
18 whether the product is delivered in the state
19 or out of the state, setting the tax rate to
20 the same rate as that of the buyer's state.
21 Essentially, this means the states could
22 repeal their export exemptions from sales
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1 tax.
2 Sellers could the remit all the tax
3 they collect to their own state, and the
4 states would be free to agree with other
5 states to exchange that tax money collected
6 on those sales to those states' residents.
7 The system has already been proven
8 to work. We have a working example of this.
9 It's the International Fuel Tax Agreement.
10 There a similar system was created that
11 currently collects fuel use taxes for all the
12 continental states from multi- state
13 truckers. Further details on this system is
14 available in our written comments.
15 The American economy, fueled by the
16 efficiencies technology has brought us is the
17 envy of the world. Let's not jeopardize our
18 continued success by choking small and medium
19 businesses with tax burdens that threaten
20 their new-found access to national
21 marketplaces that the Internet gives us.
22 The three actions mentioned above
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1 would ensure that the U.S. maintains and
2 further promotes a free, open marketplace
3 that benefits both businesses and consumers
4 in all areas of our nation. I'd like to
5 thank the Commission again for this
6 opportunity to speak, and I would welcome
7 questions on this.
8 CHAIRMAN GILMORE: Ms. Caldwell is very
9 effective and efficient, and I appreciate it
10 very much. Each of the Commissioners, by the
11 way, has had an opportunity to offer
12 presenters to this panel, and we have
13 accommodated to the greatest extent to
14 eliminate duplication, but basically to
15 accommodate every Commissioner. We haven't
16 said which Commissioner is offering which
17 person, but Dean, I think you might have
18 blown your cover on this one.
19 MS. CALDWELL: I don't think that's
20 true.
21 CHAIRMAN GILMORE: But nevertheless,
22 this was very, very effective, and we thank
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1 you.
2 MR. ANDAL: I thought she was very
3 effective.
4 CHAIRMAN GILMORE: Yeah. I thought you
5 might. The next speaker is Harley Duncan.
6 He is the director of the Federation of Tax
7 Administrators. Mr. Duncan?
8 MR. DUNCAN: Thank you, Mister
9 Chairman and members of the Commission. My
10 name is Harley Duncan. I'm the executive
11 director of the Federation of Tax
12 Administrators which is an association of
13 state tax administration agencies in the 50
14 states, the District of Columbia, and New
15 York City.
16 It's a pleasure to be here with
17 you. The work that you have before you on
18 the application of sales and use tax to
19 electronic commerce as well as other state
20 and local taxes is of profound importance to
21 the states.
22 Based on estimates of electronic
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1 commerce that reach consumer sales, using
2 electronic commerce and the Internet of $100
3 billion by the year 2003, we estimate that
4 the revenue consequences to the state of
5 uncollected use tax could reach as much as $4
6 billion in that year alone of 2003. When
7 combined with other direct marketing, could
8 reach as much as $10 billion in the 5-year
9 period.
10 That's of course of great
11 importance to state and local governments,
12 and we're willing and pleased to work with
13 you in trying to address that particular
14 issue.
15 I was asked and will direct my
16 comments particularly to technologies that
17 are used today to help administer sales and
18 use tax and simplify sales and use tax
19 administration at the seller level. I think
20 the punch line is essentially this, that
21 there are several technologies and software
22 packages that are used today that can
35
1 effectively deal with much of the complexity
2 that is there.
3 The states are also taking steps to
4 help reduce use technology to reduce that
5 complexity, and that they provide a
6 foundation for which we can build what some
7 would refer to as a 21st century tax system
8 to deal with electronic commerce.
9 Technology alone is not a
10 sufficient answer. There's no sense of just
11 automating the complexity. We really do need
12 to think about ways to simplify the system so
13 that sellers can operate at a reasonable cost
14 and that there are strategic simplifications
15 that are necessary.
16 The final point is that I think the
17 leadership of this particular Commission can
18 get us to a system that adapts both strategic
19 simplifications and advanced technologies to
20 reduce the burden and, hopefully, as much as
21 possible, take the seller out of the
22 collection responsibility entirely.
36
1 When one looks to existing
2 technologies, there are at least three firms
3 out there today that purport to have a
4 comprehensive system of sales tax
5 administration that they offer. Their
6 publicly available information talks about
7 their ability to make taxability
8 determinations by product; to make tax rate
9 determinations by location; to deal with
10 exempt questions of exempt uses, exempt
11 products, and exempt entities; as well as to
12 offer filing and returns and remittance
13 services.
14 In the area of assigning tax rates,
15 these packages generally work from an
16 individual address, add to it some public
17 information from the Postal Service, and then
18 are required to use proprietary techniques
19 and software to get to an actual tax rate
20 determination. In the area of exemptions,
21 they deal with certificates, the processing
22 and administration of those, as well as
37
1 product codes to deal with exempt products.
2 As far as returns and remittances, they all
3 have a fairly robust package of those.
4 States are taking steps in each of
5 these areas as well of using geographic
6 information systems to assign tax rates; of
7 offering electronic filing alternatives,
8 electronic payment alternatives; and other
9 approaches to it.
10 As I said, technology alone is not
11 the only answer. We need to deal with
12 simplifications. There are two types that I
13 would suggest. Rates and exemption
14 administration are exceedingly important.
15 Most importantly, we need to really re-look
16 at the relationship between the seller and
17 the state and offer hold harmless and safe
18 harbor so that good- faith efforts to comply
19 with the tax law aren't unreasonably
20 penalized, and if you take steps to do it
21 right, you're not punished on audit.
22 I think if we could combine these
38
1 simplifications along with advanced
2 technologies, we can develop a system that
3 really does take the seller out of it and
4 deal with it in a third-party situation where
5 the states are involved and the sellers are
6 involved, but take the seller out of it.
7 It's really the political leadership of this
8 group and the technology leadership of this
9 group that can us there. Thank you very
10 much.
11 CHAIRMAN GILMORE: Mr. Duncan, thank you
12 very much, and I think there will be
13 extensive questions and answers and
14 interactions with you all as we proceed on
15 further. The will of the Commission is to
16 get through the presenters first and then
17 leave a broad amount of time for the rest of
18 the day to in fact interact with you and with
19 each other.
20 So, thank you very much. Please
21 standby not too far away, and we then move to
22 our second panel, and they are Jim Eads,
39
1 George Isaacson, Randy Johnson, and Joe
2 Brooks. If you would all please come forward
3 and take your seats, and we will begin.
4 Gentlemen, welcome to the second
5 panel to be presented today. We appreciate
6 your willingness to be here at the call of
7 the Commission, and we're looking forward to
8 this. The first presenter on our second
9 panel, second group that is coming forward,
10 is Jim Eads. He is a partner Ernest & Young.
11 Mr. Eads, thank you very much.
12 MR. EADS: Thank you, Mister
13 Chairman. I appreciate the invitation to
14 appear before you today. As you have
15 indicated, I am Jim Eads. I am a partner
16 with the public accounting firm of Ernst &
17 Young. I practice in the area of state and
18 local taxes dealing with telecommunications
19 and electronic commerce.
20 I know we have a brief period of
21 time to present to you today, and so I would
22 like to begin by no doubt dealing with an
40
1 issue that's uppermost in your mind, that
2 being highway safety.
3 As you know, there are accidents
4 occurring on the streets and highways of this
5 country every day that cause death and
6 destruction. State and local governments are
7 attempting to ameliorate that by passing laws
8 and having enforcement agents out there, but
9 they're not able to do it completely.
10 So perhaps one solution to that
11 problem could be to require every seller of
12 automobiles everywhere in the country to know
13 what the speed limit is wherever the buyer is
14 going to garage that car and install a device
15 on that vehicle so that it doesn't exceed
16 that posted speed limit.
17 Now, if you think that is an
18 impractical solution, my purpose in using
19 that analogy is to suggest to you that the
20 imposition of the current sales and use tax
21 system to electronic commerce in remote sales
22 makes as much sense as that analogy. It is
41
1 simply too complex to overlay that system
2 onto the kind of commerce in this country
3 today.
4 You asked me in your invitation to
5 come to you with a solution. Obviously, my
6 solution depends upon how I define the
7 problem. I have defined the problem as you
8 might expect to be the complex state and
9 local tax system that exists today that
10 encourages avoidance of tax collection
11 responsibilities and places an unreasonable
12 burden on all forms of interstate commerce.
13 My solution: Simplify, simplify,
14 simplify. Pervasive simplification of the
15 state and local tax system is necessary if
16 this Commission is to be successful in
17 achieving its mandate and is an essential
18 prerequisite to all of your discussions of
19 all of the issues that you're going to
20 debate.
21 The issue that I am going to
22 discuss is not whether or not certain things
42
1 should be taxed, and not whether or not
2 governments have a need for revenues to
3 provide essential services to citizens, but
4 the cost and the process by which those taxes
5 are collected and the persons on whom those
6 costs fall. You have in your packet of
7 materials a study that Ernst & Young has
8 recently done measuring the cost of
9 compliance of sellers.
10 The primary conclusion of that
11 study is that the cost of collecting sales
12 tax falls on retailers, small business,
13 medium size, and large, and is a cost that is
14 out of line with the amount of revenue that
15 has actually been collected.
16 To address the question of whether
17 or not simplification is within your purview,
18 it clearly is within the purview of the
19 Commission to suggest these areas. Not only
20 that. It is clearly within the purview of
21 Congress to take some action in response to
22 recommendations that you might make. You
43
1 heard yesterday about the 4-R Act (Railroad Revitalization and Regulatory Reform Act of 1976 – prohibited states from taxing railroad property more heavily than other industrial and commercial property)
2 You heard yesterday about Public Law 86272.
3 Congress has acted in the past to
4 circumscribe the instances of state and local
5 taxation when it determined that state and
6 local taxation constituted a burden on
7 interstate commerce. I suggest to you that
8 the complexity of state and local sales and
9 use taxes today constitute that kind of
10 burden and is a legitimate issue for this
11 Commission to address, and for Congress in
12 turn to act.
13 It is not to say that there not
14 worthy efforts going on in the state area
15 dealing with simplification. Certainly, in
16 Utah, and Washington, and Idaho, there is a
17 three-state effort going on to try to
18 simplify taxes in those jurisdictions for
19 multi-state sellers. Other studies are
20 underway in individual states to deal with
21 that.
22 But I suggest to you that
44
1 simplification cannot be left to state and
2 local governments alone. Guidance must come,
3 first, from this Commission, and I think
4 ultimately from Congress.
5 The complexity of state taxes has
6 already been recognized. I have read an
7 interview given by Governor Leavitt in which
8 he uses a wonderful illustration about taxing
9 peanuts and how the sale of peanuts is taxed
10 in the different state and local
11 jurisdictions.
12 I have read comments from
13 Mr. Pottruck about the complexity of this
14 system that he did not realize existed prior
15 to his service on this Commission. I know
16 that of course Mr. Armstrong's comments in
17 his opening remarks at the first Commission
18 meeting in which he noted that the AT&T
19 enterprise is forced to file 39,812 state and
20 local tax reports a year.
21 I've done that math on that. If
22 you divide that number of returns
45
1 by 52, 40-hour weeks, it's a state and local
2 tax report every 3.12 minutes. That
3 constitutes my definition of a burden on
4 interstate commerce.
5 Now, as to the suggestions you've
6 already heard, I think some very meaningful
7 comments from the earlier panel, but clearly
8 a single rate per state would go a long way
9 towards addressing some of these problems. I
10 think also there needs to be a sufficient
11 amount of lead time when changes are made.
12 One of the difficulties of interstate
13 businesses today is knowing when changes
14 occur.
15 If a city council acts tonight in
16 its meeting to change a tax rate, how is a
17 multi-state business across the country to
18 know when that happened, when it's effective,
19 and what they should do to comply. Quite
20 frankly, forcing retailers to collect the tax
21 is an act that requires some compensation.
22 Retailers are absorbing a great deal of
46
1 governmental cost in order to do this, and
2 they should be compensated for that.
3 Finally, I should say that there
4 are issues of sovereignty obviously in this
5 matter. What I suggest to you is that no
6 state or local government can act alone.
7 They need to see their tax law as a part of a
8 cumulative burden, and this Commission, if it
9 is to fulfill its mandate, should recommend
10 simplification.
11 CHAIRMAN GILMORE: Mr. Eads, thank you
12 very much. We appreciate that. The next
13 speaker is George Isaacson from the Direct
14 Marketer's Association. Mr. Isaacson?
15 MR. ISAACSON: Thank you, Governor
16 Gilmore. My name is George Isaacson. I'm
17 tax counsel for the Direct Marketing
18 Association. I was a member of the NTA
19 project steering committee, and also a member
20 of its drafting committee. Perhaps,
21 Governor, one of the advantages of being in
22 the second wave of speakers is that I can
47
1 focus my remarks on some of the issues which
2 my good friends from the state side of this
3 issue presented in the first wave.
4 If you listen to state and local
5 government speakers on this subject, you
6 would believe that there are basically two
7 problems that we have in this country. One
8 of them is the United States Constitution,
9 and the other is electronic commerce. I'm
10 concerned that this is a great misperception
11 of the issue.
12 It's a frequent that the Commerce
13 Clause is presented as being an anachronism,
14 a constitutional loophole. Much the
15 contrary, the Commerce Clause of the
16 Constitution was the Founding Fathers'
17 efforts to create a common market among the
18 states, and they did so 200 years before the
19 Europeans got the idea. Perhaps the best
20 example of the success of that common market
21 has been electronic commerce.
22 The fact that a merchant anywhere
48
1 in this country with a good idea can have the
2 temerity to believe that he can market to
3 America is made real because of the Commerce
4 Clause. I think it would be very dangerous
5 for us to sweep Commerce Clause protections
6 aside because we think that they interfere
7 with state tax administration.
8 The second issue that would seem to
9 be the problem in listening to my friends on
10 the state and local side is electronic
11 commerce. The growth of electronic commerce
12 is going to hinder the states in their tax
13 collection efforts, and there was the
14 suggestion during the first wave of speakers
15 that somehow schools will go unfunded.
16 The fact of the matter is that
17 information technology and electronic
18 commerce have been the greatest economic
19 engine of the 20th century. It has created a
20 rising tide in which not only the American
21 economy has prospered, but state revenues
22 have prospered.
49
1 USA Today reports that the states
2 can't spend fast enough as they racked up $33
3 billion in surpluses this year. The fact of
4 the matter is that a healthy economy is good
5 for state revenues, and there would probably
6 be no faster way to arrest the growth of
7 electronic commerce than to remove
8 constitutional protections and impose tax
9 collection obligations for 7,000 different
10 sales and use tax jurisdictions on remote
11 sellers.
12 The important issue I think that's
13 presented for this Commission is separating
14 fact from reality, and that's why in my
15 written submission to the Commission which is
16 entitled "Exploding NEXUS Myths," why
17 existing constitutional standards are both
18 fair and good national policy, I attempt to
19 walk through what I think are the mythical
20 elements.
21 For example, there's this notion
22 that there's not an even playing field, that
50
1 somehow there is unfair competition in the
2 marketplace because of current constitutional
3 standards, and that it's the fault of
4 electronic commerce. Well, in fact, local
5 merchants, Main Street merchants, have been
6 riding the electronic highway. It is the
7 Internet which has made it possible for
8 small, regional merchants to access a
9 national market, to do so quickly, and to do
10 so in an unfettered fashion.
11 It is going to be small companies,
12 it is going to be local merchants, who are
13 hampered if their ticket to that electronic
14 highway is an obligation to collect taxes on
15 behalf of 7,000 jurisdictions, or even on
16 behalf of 45 jurisdictions. The current
17 economic reality is that the electronic
18 highway is good for the states, it's good for
19 small merchants, and it's good for national
20 merchants.
21 Now, I was encouraged by Mr. Bucks'
22 and Mr. Duncan's suggestion that the first
51
1 order of business really needs to be to have
2 substantial simplification of existing state
3 sales and use tax systems and, in fact, even
4 the suggestion that there may be
5 technological alternatives that could take
6 the merchant out of the process altogether.
7 Those are constructive and positive
8 statements.
9 The reality is that that plan has
10 not taken shape. Despite the fact that the
11 National Tax Association Project spent more
12 than 2 years on it, we were not able to
13 discover any existing technology that
14 resolves that issue. We were not able to
15 discover a format yet that takes the merchant
16 out of the process.
17 So, the real question is what's the
18 first order of business, and I believe that
19 the first order of business is to reform
20 existing state tax systems before we talk
21 about expanding or exporting those tax
22 systems across state boundaries.
52
1 It's important for the members of
2 this Commission to recognize that the sales
3 and use tax system that we have in this
4 country was developed during the Depression.
5 It was developed at a time when because of
6 massive unemployment and bankruptcies, state
7 income taxes did not produce sufficient state
8 revenue in order to support government
9 services. It was developed at a time when
10 the customer, the retailer, the product, and
11 the cash register were all at the same place
12 at the same time in conducting a transaction.
13 It was conducted at a time when the
14 average tax rate was 1 or 2 percent. The
15 notion of taking this antiquated tax system
16 and exporting it across state boundaries and
17 imposing it on a new technology and believing
18 that that can be done so in an innocuous and
19 harmless fashion is unrealistic.
20 CHAIRMAN GILMORE: Thank you,
21 Mr. Isaacson. We'll be back to you in the
22 immediate future, and we appreciate this.
53
1 The next person to speak is Commissioner
2 Randy Johnson. He is the chair of the
3 Hinnepin, Minnesota County Board.
4 Mr. Johnson?
5 MR. JOHNSON: Thank you, Mister
6 Chairman, and thank you for this opportunity.
7 As you said, I chair the Hinnepin County,
8 Minnesota, Board of Commissioners, that's
9 Minneapolis and suburbs. I'm also the past
10 president of the National Association of
11 Counties.
12 Mr. Isaacson on behalf of the
13 Direct Merchants said that state and local
14 government officials seem to see two problems
15 with society today, the U.S. Constitution and
16 e-commerce. I think he has it backwards.
17 The e-merchants seem to see two problems in
18 society today as perhaps two opportunities.
19 One, they would see the U.S.
20 Constitution as an opportunity to shield them
21 and make them a special class of merchants
22 selling. Second, they see the Internet as
54
1 such a magical, mystical tool that they can
2 use that as another way to make them a
3 special class of merchants.
4 I'm going to read my remarks.
5 You've all received them. There are four
6 principles. Number one is there should be a
7 level playing field in commerce. The federal
8 government should not create an elite class
9 of merchants that Congress exempts from
10 collecting transaction taxes just because
11 some part of that transaction takes place on
12 the Internet, and it really is that simple.
13 Second, the federal government
14 should enable and certainly should not impede
15 efficient enforcement of the existing laws on
16 taxes on sales. One of the great myths about
17 the Internet, it's an urban legend now and
18 I'm sure we'll hear it over and over again
19 here and you've all heard it over and over
20 again, that myth is that the Internet
21 transactions are tax free, and some merchants
22 perpetuate that myth over and over and over
55
1 again with the slogan and the seductively
2 simplistic idea, "Don't tax the Internet."
3 Wrong.
4 Every state that has a general
5 sales tax also has a use tax to cover
6 purchases of the goods and services from
7 out-of-state merchants. But use taxes are
8 costly and inefficient, and inefficient to
9 collect, but it can be done.
10 Use taxes can be collected, and if
11 Congress should persist in protecting
12 Internet merchants, there are other ways of
13 collecting use taxes.
14 For example, those who deliver
15 goods using state and local roads and
16 highways and facilities could become the tax
17 collectors. Is that inefficient?
18 Absolutely. Is it constitutional and legal?
19 You bet. Is that right route to go? I don't
20 think so.
21 Now, because I'm a conservative and
22 a Republican, I believe that the government
56
1 that's closest to the people generally
2 governs best, but local government and state
3 government cannot run on an empty tank.
4 There are only three real sources of revenue:
5 Taxes on property; taxes on income; and taxes
6 on sales. As a conservative, I don't like
7 taxes on income.
8 I believe people ought to be
9 encouraged to work and keep the fruits of
10 their labor. Property taxes are almost
11 inherently regressive and have little to do
12 with the value of services delivered.
13 However, taxes on sales, even though I don't
14 like any kinds of taxes, if we want to tax
15 behavior we want to discourage and not tax
16 behavior we want to encourage, well, it's
17 been a long time since anybody has said
18 Americans consume much too little and save
19 far too much.
20 The fourth principle of sales taxes
21 can be calculated with the software that
22 exists today. It's a myth that it can't be
57
1 done. Mr. Duncan who spoke who earlier, the
2 director of the Federation of Tax
3 Administrators, explained what can be done.
4 It can be updated. It can deal with special
5 situations. It's a myth that it can't be
6 done.
7 In conclusion, let me just say
8 state and local governments do not create
9 poor people by collecting taxes. That's a
10 myth. That's some sort of nostalgic,
11 romantic nonsense.
12 Second, it is very inconsistent, it
13 is very inconsistent, to devolve
14 responsibilities to state and local
15 governments and then remove the ability of
16 these governments to pay for the
17 responsibilities that have been devolved unto
18 them. You can't have it both ways.
19 Third, it just plain unfair for
20 Congress, the federal government, to
21 intervene in the marketplace and create an
22 elite class of merchants just because those
58
1 merchants happen to use the Internet for some
2 part of their transactions. It's that
3 simple. It's that fair. We can use
4 e-commerce, we can use this great economic
5 engine, and we can use it without reducing
6 state and local governments. Thank you.
7 CHAIRMAN GILMORE: Thank you,
8 Mr. Johnson. Very effective. I appreciate
9 that. The next speaker is Councilman Joe
10 Brooks. He is representing the Council of
11 State Governments, the International and
12 County Management Association, the National
13 Conference of State Legislators, the National
14 Association of Counties, the National
15 Governor's Association, the National League
16 of Cities, the U.S. Conference on Mayors. By
17 coincidence, he is from my hometown,
18 Richmond, Virginia. Welcome, Mr. Brooks.
19 MR. BROOKS: Thank you, Governor.
20 In additional to the list that the Governor
21 has listed, we do have letters of support
22 from the National School Boards Association,
59
1 the American Association of School
2 Administrators, and the American Book
3 Seller's Association.
4 Mister Chairman and members of the
5 Commission, it is an opportunity that I have
6 should I say looked forward to speak to you
7 today. Isn't it wonderful to be a locally
8 elected official at a time like this? You
9 just really enjoy being involved in this kind
10 of discussion.
11 Combined as a group of people who
12 represent states, cities, and counties of all
13 sizes, we represent thousands and thousands
14 of elected and appointed officials who run
15 these governments. Let me assure you that
16 the work of this Commission is and will
17 continue to be our highest joint priority for
18 the immediate future.
19 The recommendations that you make
20 to the Congress next spring will have an
21 enormous impact on our ability as locally
22 elected officials to deliver public services
60
1 to our shared constituencies. You definitely
2 have our undivided attention.
3 In addition to serving as a council
4 member in Richmond, I chair the National
5 League of Cities Finance, Administration, and
6 Inter-Governmental Relations Committee which
7 has been charged with developing the National
8 League's policy on remote commerce.
9 Also I represented NLC on the
10 National Tax Association, Communications and
11 Electronic Commerce Tax Project. In the
12 past, I was chairman of the Finance Policy
13 Committee for the Virginia Municipal League.
14 So, my public service has involved me a great
15 deal in the financial area of local
16 government.
17 You have a copy of the state and
18 local association statement of principles for
19 marketing, for making electronic commerce
20 fair, and modernizing the state tax system.
21 I will not repeat what is in that statement,
22 but I will emphasize three key points that I
61
1 hope will help shape your thinking on this
2 important issue.
3 First point, a permanently tax-free
4 electronic marketplace would have a
5 significant impact on our ability to deliver
6 essential public services. We are not
7 talking about singling out the Internet for
8 additional taxation or adding new tax burdens
9 to the American consumer.
10 As other speakers have said, we are
11 talking about collecting legally due sales
12 and use taxes on goods and services based on
13 existing law regardless of how those
14 purchases are made. We believe the lost
15 revenue from tax-free online shopping will be
16 material. That has already been alluded to.
17 In Richmond, the state-shared
18 revenue from sales tax comprises 6.84 percent
19 of the general fund budget of the city of
20 Richmond. It comprises 8.83 percent of our
21 school budget. The state-shared portion of
22 sales tax. If our sales tax basis shrinks
62
1 dramatically or even disappears because of
2 tax-free online shopping, we will be forced
3 to seek revenues, and I like to think in
4 terms of revenues because taxes carries a
5 connotation, but it includes taxes in other
6 areas to provide essential public services
7 like police, fire protection, public
8 education.
9 No elected official wants to raise
10 taxes, increase user fees, or eliminate
11 fundamental services because of a reliable
12 and reasonably well- accepted revenue source
13 is shut down.
14 Point two. Giving online vendors a
15 competitive advantage over local merchants is
16 just plain unfair. I hope you read the story
17 in the June 27th edition of "The New York
18 Times" about the River Gate Books in
19 Lambertville, New Jersey. Closed after 10
20 years because the owner says she could not
21 compete with online book sellers.
22 Yes, it is only one book store, and
63
1 it might have happened anyway because of the
2 convenience of online shopping. But this
3 Commission should not endorse actions that
4 will make it even easier for amazon.com and
5 other online sellers to overwhelm the Main
6 Street merchant or the Main Street business
7 because online sellers offer consumers a tax
8 break.
9 The third point is dealing
10 with 7,400 taxing jurisdictions with
11 different bases and rates will be challenging
12 to national vendors, but the software to do
13 the job has already been alluded to and it's
14 already available. It is unreasonable to
15 suggest that the high-tech minds that have
16 made it possible to buy anything anytime from
17 anywhere online could not design software to
18 apply state and local taxes to those
19 purchases.
20 We know of many vendors who've said
21 they can provide the resources to online
22 businesses at reasonable prices to minimize
64
1 the burden of collecting legally due sales
2 taxes. At the same time, we support and
3 encourage voluntary efforts to simplify the
4 tax system. Already alluded to is the
5 Northwest regional sales tax pilot which is
6 bringing together state, local, and business
7 leaders in Utah, Idaho, and Washington, to
8 explore these ways.
9 Having participated in the work of
10 the National Tax Association's project, I am
11 well aware of the complexity of our tax
12 structure and the challenges that lie ahead
13 as the Internet changes the way we do
14 business.
15 There are so many other examples of
16 inventions and technological advances that
17 dramatically changed our day-to-day lives and
18 required major adjustment in public policy to
19 meet these changes. We've adjusted to these
20 changes.
21 As leaders of the nation's states,
22 counties, citizen towns, we urge you to pay
65
1 close attention to the principles we have
2 outlined in our statement which focuses on
3 the importance of equity, fairness, and
4 partnerships as we shape this new
5 marketplace.
6 CHAIRMAN GILMORE: Thank you,
7 Mr. Brooks. We appreciate the benefit of
8 this, and we will look forward to interacting
9 with you on some of the Q&A in just a few
10 minutes.
11 MR. BROOKS: Okay. Thank you.
12 CHAIRMAN GILMORE: The next panel that
13 is to come forward is Bruce Josten, State
14 Representative Matthew Kisber, State Senator
15 Steve Rauschenberger, and Terrence Ryan.
16 Gentlemen, good morning. We thank you very
17 much for being here. Bruce Josten is a
18 representative of the United States Chamber
19 of Commerce. Welcome, and thank you for your
20 comments.
21 MR. JOSTEN: I'm Bruce Josten. I'm
22 executive vice president for government
66
1 affairs at the U.S. Chamber of Commerce, and
2 the chamber does greatly appreciate the
3 opportunity to be here today.
4 The Internet has begun to
5 dramatically change the way America does
6 business, and if the projections of future
7 growth are even remotely accurate, these
8 changes will only intensify. In fact, change
9 is the only constant with respect to the
10 Internet. These changes go on to question
11 certainly the way we raise tax revenue.
12 Broad issues of tax fairness, state revenues
13 and macroeconomic impacts raise concerns over
14 whether we should tax the Internet.
15 The characteristics that define the
16 Internet raise questions and concerns over
17 whether we could effectively tax it if we
18 choose to. However, I believe we have an
19 obligation to seek answers before we move too
20 precipitously.
21 Rather than viewing these
22 challenges as a threat, we would suggest we
67
1 view them as an opportunity, an opportunity
2 to rethink our current tax system and create
3 a system that is simpler and fairer with
4 minimal compliance costs, a system that will
5 in fact complement the economy of the 21st
6 century.
7 Internet growth projections are
8 startling. This growth will not only
9 contribute directly to GDP, but it has the
10 beneficial by-product of fostering
11 productivity growth across most sectors of
12 the economy.
13 Our recent unprecedented run of
14 strong economic growth and low inflation
15 would have been impossible without a surge in
16 productivity and nurtured by technology and
17 use of the Internet. Taxing this wellspring
18 of economic activity may not be the best way
19 to raise needed tax revenue.
20 Taxation of the Internet also
21 raises questions of tax fairness and state
22 tax revenue needs. Although it is unfair to
68
1 tax traditional retail vendors while allowing
2 virtually online sellers to operate tax free,
3 placing a tax in Internet sales may not be
4 the best way to achieve fairness. Because
5 the Internet provides a marketplace far
6 beyond a company's physical location, many
7 entrepreneurs are finding that they can
8 operate a business nationally and even
9 internationally from small-town America.
10 Interestingly, this past Saturday
11 "The Washington Post" reported that the
12 National Trust for Historic Preservation says
13 that this very technology is now contributing
14 to a revival along the nation's Main Streets,
15 and its executive director for the Main
16 Street Center says he sees massive growth of
17 location-neutral businesses on Main Street.
18 The impact of potential impact of
19 e-commerce on state and local governments to
20 raise revenues has been cited repeatedly as a
21 reason to tax the Internet. However, even
22 though sales taxes are a very import source
69
1 of state revenue, we do have time to examine
2 the repercussions before we act. The
3 combined 1997 fiscal balance across all 50
4 states was in surplus by some $19 billion,
5 and recent upward revisions to our economic
6 growth potential over the coming decade
7 suggests the states' ability to collect tax
8 revenues will be increased substantially.
9 Even if the decision were made to
10 tax the Internet, its very nature raises
11 questions as to whether it could be taxed.
12 To impose a tax, a taxing authority must be
13 able to identify, measure, and verify the
14 occurrence of a taxable event. Many of the
15 characteristics of the Internet make it
16 difficult if not impossible to identify the
17 who, what, and where of e-commerce
18 transactions.
19 Central to that difficulty is the
20 tension between the government's right to
21 verify transactions for taxability, and an
22 individual's constitutional rights to
70
1 privacy. Verification would necessitate the
2 monitoring and decrypting of personal
3 transmissions, a chilling prospect. Privacy
4 and liberty cannot and should not take a back
5 seat to taxability.
6 In addition, the mobility of
7 parties to Internet transactions and their
8 ability to relocate to other jurisdictions
9 offer opportunities for tax shifting,
10 minimization, and evasion. Likewise, the use
11 of electronic cash further erodes the ability
12 of tax authorities to monitor transactions by
13 allowing the easy transfer of digital phones
14 offshore.
15 The tax system we have now is
16 clearly a mess. Internet taxation is not the
17 problem. It is instead a chance to rethink
18 the way we do the taxes. Internet provides
19 us with an opportunity to create a new system
20 of taxing for a new economy, one that is not
21 only consistent with economic growth but, in
22 fact, conducive to that very growth. Thank
71
1 you.
2 CHAIRMAN GILMORE: Thank you,
3 Mr. Josten, very much. Our next speaker is
4 Representative Matthew Kisber, State of
5 Tennessee. Is it State Representative?
6 MR. KISBER: Yes, sir.
7 CHAIRMAN GILMORE: Thank you for being
8 here, Mr. Kisber.
9 MR. KISBER: I am Matthew Kisber, a
10 member of the Tennessee House of
11 Representatives, where I serve as chairman of
12 the Finance, Ways and Means Committee. I'll
13 add that Tennessee is a state that depends
14 upon the sales tax for some 60-some percent
15 of our general fund revenues.
16 I'm joined this morning by Senator
17 Steven Rauschenberger, chairman of the
18 Illinois State Appropriations Committee. We
19 both serve as co- chairs of the National
20 Conference of State Legislatures, Executive
21 Committee Task Force on State and Local
22 Taxation of Telecommunications and Electronic
72
1 Commerce.
2 On behalf of Steve and myself, I
3 would like to thank you, Governor Gilmore,
4 and the members of the Commission for the
5 opportunity to address the Commission. We
6 speak on behalf of NCSL, a bipartisan
7 organization representing all elected state
8 legislators from the 50 states, our nation's
9 commonwealths, territories, and possessions.
10 We recognize the vital economic
11 force that the Internet and advanced
12 telecommunications services will be for our
13 state and our nation. We are as concerned as
14 you about the unintended consequences of
15 obsolete, discriminatory, or multiple taxes
16 on this vital new technology.
17 With that said, we need to make
18 clear that state legislatures are equally
19 concerned about the impact that our inability
20 to collect sales and use taxes on electronic
21 commerce transactions will have on state
22 revenues, and the unfair competitive burden
73
1 it could have on small Main Street businesses
2 in our communities.
3 As we all know, taxes are not very
4 popular. However, if state and local
5 governments are to provide basic necessary
6 services like education and public safety,
7 then we need to have the ability to levy
8 taxes. When you ask taxpayers which of all
9 the major federal, state, and local taxes is
10 the least unpopular or onerous, sales and use
11 tax is the big winner.
12 In some states like Michigan, the
13 voters by a comfortable margin chose to
14 finance their state's educational
15 improvements through the imposition of a
16 sales tax rather than relying on the property
17 tax, and then voted to increase the sales tax
18 that they'd pay. We understand that the
19 voters in Arkansas may soon be asked to
20 approve a similar referendum.
21 As state legislators, we recognize
22 the problem. Over the last 60 years, some
74
1 states have created a confusing,
2 administratively burdensome tax system with
3 very little regard for the compliance burden
4 placed on multi-state businesses. The NCSL
5 task force that we chair has identified six
6 principles to govern the reform and
7 modernization of state and local sales and
8 use and telecommunications taxes.
9 These principles are, first, state
10 and local sales and use taxes and
11 telecommunication taxes should treat market
12 participants in a competitively neutral
13 manner.
14 Second, sales and use taxes are
15 vital to states' sovereignty and autonomy, an
16 important strength in our federal system.
17 Third, participants in electronic
18 commerce should not receive preferential
19 treatment. Nor should they be subject to
20 special, discriminatory, or multiple taxes.
21 Fourth, states recognize the need
22 to undertake significant simplification of
75
1 state and local sales and use taxes to reduce
2 the administrative burden of collection.
3 Fifth, under a simplified system,
4 remote sellers without regard to physical
5 presence in the purchaser's state should be
6 required to collect and remit sales and use
7 taxes.
8 Sixth, NCSL encourages current and
9 future cooperative efforts by states to
10 simplify the operation and administration of
11 sales and use taxes.
12 We also include in our statement of
13 principles the reaffirmation of a
14 long-standing policy that NCSL would continue
15 to oppose any federal action to preempt the
16 sovereign and constitutional right of the
17 states to determine their own tax policy in
18 all areas including telecommunications and
19 electronic commerce.
20 The state of principles was
21 unanimously endorsed by NCSL's membership
22 during our annual meeting this summer in
76
1 Indianapolis.
2 I wish to close by saying that not
3 only am I a citizen legislator. I'm a
4 small-business owner as well. I understand
5 the complexities which are involved in this
6 issue and appreciate your thoughtful and
7 careful examination. At this time, I would
8 like to ask Steve to address the three
9 options that we believe the Commission has in
10 making their recommendations.
11 CHAIRMAN GILMORE: Representative
12 Kisber, thank you very much, and we will now
13 hear from Steve Rauschenberger.
14 MR. RAUSCHENBERGER: We provided
15 prepared remarks to all of the Commissioners,
16 and I would refer you to those for a copy of
17 the six principles that were adopted by NCSL.
18 I'll just make a few comments to try to move
19 you along because I know people want to fly
20 out. I'm used to being on the other side of
21 the microphone as the appropriations chairman
22 in Illinois. We have a $43 billion state
77
1 budget that is approximately 40 percent
2 dependent on sales tax revenues in the State
3 of Illinois.
4 I was also an impress tax collector
5 for the State of Illinois for more than 15
6 years. I ran three home furnishing stores
7 into the ground prior to my election to the
8 State Senate. I'm a third-generation
9 retailer, and I know the frustrations both of
10 collecting taxes for states, as well as in
11 the home furnishings industry we were one of
12 the first to materially feel market effects
13 of out-of-state transactions and
14 transshipping and a number of other issues.
15 So, I come to this discussion with some
16 familiarity.
17 I think the credibility of the
18 report that you gentlemen and ladies agree to
19 is going to be dependent on recognition of
20 some important points that I haven't heard
21 discussed with a lot of frequency yet. If
22 your report doesn't recognize state
78
1 sovereignty, I think that there's a
2 credibility issue. If your report doesn't
3 recognize the federalism model that has been
4 operative in the United States for more
5 than 200 years where states in effect act as
6 laboratories of democracy and provide most of
7 the policy innovation that takes place in the
8 United States, I think you're missing a major
9 point of your work.
10 I believe states need to be
11 encouraged, and I think properly encouraged,
12 states will move to a zero-burden collection
13 system and to standardization of both rates
14 and definitions. We didn't build a sales tax
15 and use tax system overnight, and we wont'
16 change it overnight, and we do need some
17 incentives to do that, and we need leadership
18 and that's what I hope this Commission moves
19 toward.
20 I also think there's a good chance
21 that states will carefully examine modified
22 consumption taxes as a replacement for sales
79
1 taxes where we can take a look at net income
2 and take nonconsumption uses and apply a much
3 lower rate.
4 State taxation should be broad
5 based and low rate and it works effectively
6 across the 50 states. The 50 states are the
7 ones with the balanced budget and without the
8 long-term liabilities or obligations, and
9 generally without the swirling political
10 tensions that Congress and the federal
11 government are frequently subject to.
12 A couple of quick comments. Those
13 who argue that for creation of electronic
14 Cayman Islands for the Internet are both
15 unrealistic and naive and should recognize
16 that the public will not support or stand for
17 two-tiered treatment of transactions over
18 time. Physical NEXUS as a concept is a --
19 interim compromise to give policy makers in
20 the legislative branches time to make the
21 right decision.
22 Don't hold to NEXUS as a solution.
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1 NEXUS is an explanation by the courts based
2 on flaws in the current statutes, and I think
3 you need to recognize that.
4 I was very surprised briefly to
5 hear Ernst & Young, an accountant make a
6 lawyer's argument about vehicle
7 complications. We do require vehicles to
8 comply with 50 separate state regulations and
9 the regulations in more than 90 different
10 countries, and they manage to do that.
11 We manage to title those vehicles
12 effectively and act in the public safety by
13 making sure they're equipped with the safety
14 equipment that we believe that is socially
15 acceptable and reasonable.
16 Four quick things. I hope this
17 Commission does its work and recommends
18 equitable treatment of all participants in
19 transactional sales in electronic commerce.
20 I hope that you recommend reasonable time
21 lines for state and local reforms. I hope
22 that you make an attempt to define the scope
81
1 of acceptable burdens that remote sellers
2 should have to accept. I hope that you
3 recommend standardized rates and standardized
4 definitions.
5 There are some U.N. as I understand
6 commerce definitions that are perhaps
7 adaptable by states to try to come up with
8 common definitions. I hope that you
9 recommend reform of the multiple audit risk
10 that remote sellers are exposed to currently.
11 So, I really hope that you give us
12 an opportunity to move the ball forward and
13 to define some of the leadership issues, but
14 we hope that you're not precipitous in your
15 action and you take your time. We're
16 encouraged by the number of Governors on this
17 panel and legislators and the high-quality
18 people represented in the private sector.
19 Thank you.
20 CHAIRMAN GILMORE: Thank you very much.
21 I don't think we're precipitous anyway I can
22 say. But we appreciate very much what you
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1 have offered to us today and together with
2 the state representative as well.
3 The next individual to speak to us
4 is Terrence Ryan, the director of state and
5 local taxes, Apple Computer.
6 MR. RYAN: Thank you. I'm here
7 today because you asked for some solutions.
8 I listened to Dan Bucks earlier, and Dan said
9 we need objectives to more forward, and I'm
10 going to first offer four objectives that I
11 think you guys should have.
12 The first one we can all agree on,
13 simplicity. The second objective is
14 scalability. It needs to be scalable.
15 Because no one is really talking about the
16 problems here.
17 The problems are going to get
18 bigger in the future. We're going to have
19 cybercash. We're going to have anonymous
20 cybercash. We're not going to know where the
21 buyer is. So this solution that we comes up
22 with needs to be scalable.
83
1 The third objective is that the
2 system needs to harmonize with the other
3 industrial nations. If we don't have
4 harmonization then we're going to have more
5 problems. Number four, we need to preserve
6 the physical-presence standard.
7 The only system that accomplishes
8 these four goals is the origin-based system
9 that I'm going to talk about today. The
10 origin-based system is one rate, one set of
11 rules, based on where you're located, where
12 your Internet business is located. You'll
13 like this. There's no state sovereignty
14 issues.
15 There's no NEXUS problems because
16 you're there. You have a physical presence
17 there. There's no question about NEXUS.
18 You'll have to collect tax on all your sales.
19 It'll be based on the rate where you're
20 located. So, hopefully the revenue will be
21 there.
22 I'm not here looking for a tax
84
1 break. We collect the taxes at Apple. We do
2 a lot of business over the Internet, but
3 we're collecting the taxes. I just don't
4 like the system. In terms of harmonization,
5 Europe is going to an origin-based system.
6 You know what?
7 Those folks in Europe, they're
8 competing with us. They're competing with
9 the U.S. What they've done is they've
10 adopted the things that they felt worked in
11 the -- for example, one currency. They've
12 also broke down the barriers for trade. If
13 you've been to Europe lately, you can move
14 around without being stopped. You can go
15 from Paris all the way to Amsterdam and not
16 even know you've gone through Belgium.
17 These are important changes. But
18 what didn't they do? They didn't adopt our
19 tax system. In fact, they used to have one
20 rate per country. Some people are talking
21 about one rate per state. Well, that just
22 doesn't cut it. The European commissioners
85
1 looked at that. That was their system and
2 they said no, this isn't working. So,
3 they're going to an origin-based system.
4 I don't think they're worried about
5 companies picking up and going to the
6 lowest-rate country because the only
7 objection to this plan is the uncertainty
8 that the states and that local governments
9 have about this fear that companies are going
10 to pick up and move to the Cayman Islands or
11 Oregon. I just don't believe that's going to
12 happen. If it does, then we need to deal
13 with it. If it does happen, we need to deal
14 with it.
15 CHAIRMAN GILMORE: Mr. Ryan, I think
16 that's very interesting, and I think there's
17 going to be a lot of questions about that as
18 we go forward, and I'm looking forward to
19 that. Thank you all very much.
20 The final panel before we just move
21 into questions of discussion and debate is
22 Fran Smith, William Gregory Turner, Gary
86
1 Cornia, Kendall Houghton who I believe would
2 like to participate by phone, and I think she
3 has suffered an injury -- National Tax
4 Association, Communications and Electronic
5 Commerce Tax Project.
6 I think she's suffered an injury
7 and there have been arrangements for her to
8 do this by phone. Then finally, I propose to
9 add one person, a name that did not get
10 submitted to my attention that I think should
11 be heard, and that is an offering by Michael
12 Mazerov, Center on Budget and Policy
13 Priorities who we will add to the panel
14 without objection to discuss the digital
15 divide, and one Commissioner particularly has
16 requested that.
17 We will take then in about that
18 order if that's all right, and we will then
19 be concluded. I will introduce the
20 Commission, and then we will either move
21 straight ahead either after a break or we
22 will just not break and go straight into
87
1 discussion at the will of the Commissioners.
2 But first, our final panel, Fran Smith of
3 Consumer Alert.
4 MS. SMITH: Thank you Governor, and
5 I'm very pleased to be here. Consumer Alert
6 is a market-oriented consumer group that
7 promotes consumer choice and competition and
8 how market economies can produce advances in
9 technology that can reduce costs for
10 consumers, improve choices, and sometimes
11 improve health and safety. So, I'm here
12 looking at the tax issues and looking at some
13 of the other issues from that perspective.
14 Today my comments are going to
15 focus on what I think are some overlooked
16 benefits of competition and choice in tax
17 jurisdictions. Essentially, consumers as
18 taxpayers consider tax costs of jurisdictions
19 and respond accordingly. We know that some
20 jurisdictions can lose sales, but the can
21 also lose citizens if they overtax, just as
22 producers if they overcharge can lose
88
1 customers.
2 So, I think some of that tension
3 between jurisdictions in increasing taxes or
4 their tax base so that they can provide
5 services to its citizens is also balanced by
6 taxpayers who look at the tax base and see if
7 indeed they're getting services or whether
8 they might find them better elsewhere.
9 I live in the District of Columbia,
10 and we have three tax jurisdictions very
11 close-by, Virginia and Maryland, and people
12 make those choices on a range of issues,
13 whether to buy property, the schooling
14 issues, et cetera.
15 But today I wanted to make that
16 point about consumer choice and competition,
17 and I think state jurisdictions should look
18 at that. We support this creative tension.
19 We support the fact that as someone earlier
20 said, that states are the laboratories.
21 That's where experimentation occurs. That's
22 where we find some of the new and better
89
1 approaches.
2 We often I think in looking at tax
3 issues look at the business point of view,
4 and we look at the tax jurisdiction point of
5 view. What I think today we're not looking
6 at is the taxpayer point of view, the
7 consumer point of view, and how many of the
8 schemes for simplification, many of the
9 schemes to impose some sort of software
10 requirements on vendors, verification schemes
11 for customers and such, what that means for
12 consumers' right to privacy.
13 We have seen just recently the
14 federal government regulators in the
15 financial area imposing without much
16 knowledge of consumers massive collection
17 activities at people's banks for the public
18 good, public benefits, of getting more money
19 launderers in jail.
20 However, there was a huge outcry
21 when people realized that that meant that
22 they would be treated as criminals and that
90
1 they would be viewed by their banks as
2 potential criminals and that the data would
3 be collected in central points and could be
4 accessed by federal, state, local government
5 law enforcement.
6 That know your consumer, those
7 proposals, were quickly pulled by the
8 regulators when 250,000 consumers were in to
9 question them.
10 I would expect that some soft of
11 outcry similar to this if consumers did
12 realize that some of these proposals for
13 simplification and proposals for uniformity
14 might have some of the same consequences.
15 Therefore, I urge this Commission
16 that consumer privacy issues have to be
17 paramount. Consumers are the ones who are
18 buying the Internet, they're the ones paying
19 the taxes, and they're the ones who stand the
20 risk of having their privacy invaded by
21 having their transactions tracked and
22 monitored. Thank you.
91
1 CHAIRMAN GILMORE: Thank you very much,
2 Ms. Smith. The next speaker is Gregory
3 Turner of the California Taxpayer's
4 Association.
5 MR. TURNER: Thank you very much,
6 Mister Chairman, and members. I wanted to
7 thank you first of all thank you for the
8 gracious invitation for allowing me to come
9 and participate in this process.
10 The California Taxpayer's
11 Association is a nonprofit, nonpartisan
12 research and advocacy organization. We
13 represent businesses large and small in
14 California on tax policy matters, and with
15 the production of the Internet Tax Freedom
16 Act, we have participated in that process as
17 well. We were one of the lead advocates for
18 business in the California version of the
19 Internet Tax Freedom Act.
20 Our association generally has a
21 goal of promoting the economy in general, and
22 particularly in the nature of electronic
92
1 commerce because we think that it has so many
2 benefits for California in particular.
3 We have been very fortunate in
4 California to have had record surpluses at
5 state and local government levels for the
6 last several years. A lot of that has been
7 attributed to the growth in electronic
8 commerce. We are the home to the Internet.
9 It was invented in California. We are the
10 home of the entertainment industry that
11 provides content. We are Silicon Valley,
12 just so we get the competition rolling
13 between the states.
14 But I make that point because as an
15 association we have not come up with a
16 solution to the problem as an association,
17 but I want to provide you what I think are
18 some of the issues that this Commission needs
19 to address, and we will certainly consider
20 when recommendations are made by the
21 Commission. So, the comments I have in terms
22 of an actual solution are my own, and I
93
1 wanted you to know that up front.
2 A lot has been said so far on
3 simplicity and automation and uniformity, and
4 those are all good things, but I think that
5 they exist independent of the central
6 question which I think faces the Commission
7 which is the obligation to collect.
8 At some point the question for
9 Congress and the question for the Commission
10 is at what point of activity does a person
11 become subjected to taxes in another
12 jurisdiction. Right now we work off of
13 roughly 150 years of Supreme Court decisions
14 trying to define at what point the taxpayer
15 becomes obligated to pay tax in that
16 jurisdiction.
17 Simplicity alone does not result
18 necessarily in the obligation to collect, and
19 it is that question I think that maybe the
20 Commission can consider specifically as to at
21 what point do we force the book seller -- and
22 for every book seller that has suggested that
94
1 they've gone out of business, I've heard the
2 same from those who have found a new business
3 as a small entrepreneur who has a unique
4 business finds a market on the Internet.
5 That is the beauty of the Internet,
6 is that it's finding a market for small- and
7 mid-sized businesses. So the obligation that
8 we impose upon them to collect and remit
9 taxes to various jurisdictions can be a
10 burdensome one, but at some level it does
11 become a question of federalism as someone
12 else has suggested. That is, at what point
13 do we obligate that person as a matter of
14 public policy to collect and remit from
15 another state. So, I hope you will address
16 that question.
17 I think in terms of specific
18 proposals, the problems that have come about
19 because of electronic commerce or electronic
20 commerce is facing by state and local
21 taxation have been clearly addressed I think.
22 I think the solution actually can be fairly
95
1 simple, and that is to pursue an effort of
2 codifying existing standards for NEXUS.
3 I think that one of the biggest
4 problems facing business right now is the
5 uncertainty of independent jurisdictions
6 interpreting Supreme Court cases in different
7 manners and applying them differently to
8 different industries based on either the
9 sales and use tax or income tax which is
10 another big issue.
11 We tend to focus on sales and use
12 taxes in our comments so far, but the income
13 tax is as big an issue I think as the use tax
14 is.
15 Just one final point I want to make
16 is in our solution let us not forget the
17 ability of the states to implement the grand
18 solution. One thing I know we face in
19 California which I have yet to get an answer
20 to is the fact that -- state concept I don't
21 think is practically implementable in
22 California.
96
1 That would be something that would
2 require our constitution and a vote of the
3 people. Not to mention probably a two-thirds
4 vote of our legislature. So in some
5 respects, we need to keep a practical eye on
6 what outcome we propose. So, thank you very
7 much.
8 CHAIRMAN GILMORE: Thank you,
9 Mr. Turner. Next speaker is Gary Cornia.
10 Mr. Cornia?
11 MR. CORNIA: Thank you. My name is
12 Gary Cornia, co-chair of the National Tax
13 Association's Communication and Electronic
14 Commerce Tax Project.
15 Kendall Houghton, the other
16 co-chair, will participate via teleconference
17 with us on this statement. You have in front
18 of you copies of our statement as well as the
19 final report.
20 Electronic commerce has significant
21 implications for state and local taxation,
22 and it raises a number of questions as to
97
1 whether and how state and local taxes should
2 be applied to such commerce.
3 The National Tax Association's
4 Electronic Tax Policy Project was organized
5 to identify possible solutions to state and
6 local tax issues that may have existed in the
7 context of more traditional commerce that are
8 and have been magnified by electronic
9 commerce.
10 The project's initial work embraced
11 all types of state and local taxes. However,
12 the project's participants agreed that the
13 first set of discussions should focus on
14 sales use and telecommunications taxes.
15 Further on in the project, however, it was
16 agreed that any recommendation made with
17 respect to electronic commerce would also
18 have to be considered in the context of other
19 forms of commerce.
20 The following categories and issues
21 were addressed in the report: Sales and use
22 tax rates including the question of one rate
98
1 per state -- collect sales and use taxes and
2 other taxing jurisdiction issues; sales and
3 use tax base; sourcing of transactions;
4 simplification of tax administration -- and
5 implementation issues.
6 For many of those topics, no
7 substantial agreement on the proper
8 modification of the sales and use tax system
9 was reached.
10 However, with respect to certain
11 issues considered in isolation, the project
12 members did tentatively define a consensus
13 viewpoint. All such consensus viewpoints
14 were recorded by the projects and are noted
15 in the context of the report.
16 Nevertheless, we cannot present
17 this report without impressing upon our
18 audience the central working tenet of the
19 project: Namely, that nothing is agreed to
20 until everything is agreed to.
21 This caveat means simply that it
22 would seriously misrepresent the work of the
99
1 project to pluck any of the tentative and
2 preliminary conclusions including those
3 specifically reached by a formal vote out of
4 context and present them as a conclusion of
5 the project. Ms. Houghton will now continue
6 with the statement.
7 MS. HOUGHTON: Thank you, Gary, and
8 thank you to the Commission for accommodating
9 my situation. Gary Cornia having noted this
10 caveat, we encourage the Commission members
11 and other interested parties to review the
12 entire report at to consider ways in which
13 this concept can spur and form continued
14 examination of the critical state tax issues.
15 Each facet of the report presents -- and a
16 number of the proposals to improve the taxing
17 system -- electronic commerce --
18 CHAIRMAN GILMORE: Ms. Houghton, we're
19 having a problem hearing you over the phone.
20 I'm not sure what that is.
21 MR. CORNIA: Perhaps I should just
22 jump in and finish the statement.
100
1 CHAIRMAN GILMORE: Unless Ms. Houghton
2 is able to speak into the phone, we'd sure
3 like to hear her. But if it can't work any
4 better, Gary, you may have to finish.
5 MR. CORNIA: Thank you.
6 MS. HOUGHTON: Is this any better?
7 CHAIRMAN GILMORE: Yes, that is better.
8 Go ahead.
9 MS. HOUGHTON: I will start a
10 sentence back. Where consensus was not
11 obtained which is admittedly the case in a
12 majority of situations, our -- and the
13 resulting report still offer -- to groups and
14 individuals concerned about state and local
15 taxes. A brief overview of select -- of the
16 report serves to underscore the incredible --
17 efforts of -- members --
18 CHAIRMAN GILMORE: Ms. Houghton, I'm
19 sorry, it just isn't working. The phone is
20 cutting out. We're going to call on
21 Mr. Cornia to go ahead and complete the work,
22 but we appreciate your with us and we will be
101
1 calling you on for your written materials as
2 well.
3 MS. HOUGHTON: Well, thank you.
4 CHAIRMAN GILMORE: Gary, if you could
5 complete the presentation.
6 MR. CORNIA: Thank you. A
7 discussion of sales and use tax rates focused
8 on a dual challenge. One, developing one
9 rate per state applicable to all commerce
10 involving goods or services that are taxable
11 in that state. Two, ensuring the protection
12 and equitable distribution of revenues to
13 local jurisdictions.
14 Discussions of sourcing tackled the
15 complex questions of whether to source
16 transaction to the state level only, and
17 whether to source transactions un |
