PETSCHAUER and FRANCISCO
                                      CERTIFIED PUBLIC ACCOUNTANTS
                                                            215 Morris Avenue
                                                    Spring Lake, New Jersey 07762
                                                           TEL: (732) 449-0700
                                                           FAX:(732) 449-1777       

Advisory Commission                                                                   November 8, 1999
On Electronic Commerce
3401 North Fairfax Dr
Arlington, Virginia 22201-4498                                                    Tax Proposal

Dear Commissioners,

    Please accept our proposal regarding a fundamental restructuring and simplification of the sales and use tax system. Five years ago we commenced the “TaxNet” project with the idea of devising a high technology system that would collect and remit sales and use taxes from the point of sale with no burden on the merchant and still fit within the framework of all of the legal issues surrounding interstate sales and use taxation. Our work has led us to receive several patents from the United States Patent Office.
    
    The following information will serve as your framework around which you may choose to build a simplified tax collection system. We invite you or any other interested party to contact us regarding our proposal.

                                                                       Respectfully submitted,

                                                                       Paul Francisco, CPA

                                                                                          TaxNet Systems, Inc
                                                                                 215 Morris Ave                    
                                                                                          Spring Lake, New Jersey  07762
                                                                                          732-449-0700, 1777fax
                                                                                          petfran@worldnet.att.net
Advisory Commission on
Electronic Commerce                                                       November 8, 1999
Arlington, Virginia

   Proposal: Sales and Use Tax Collection on Interstate Purchases  C copyright 1999

   We are proposing the use of a fully electronic tax collection system that operates from
the point of sale. This system collects the tax directly from the consumer and transmits it to the government in real time. The merchant, other than an initial reprogramming of his billing software, will have no involvement in the collection, reporting and remittance of interstate use taxes. Our system does not require any third-party or middleman to collect and transmit taxes and the privacy of the individual consumer is always assured. There are no large capital outlays required to make our system functional and, finally, our system knows no boundary. It can collect and transmit taxes to any nationality.

Basic Premise -  Any single credit card transaction can have multiple payees.*
                                                                                                              *   Pat. pending
                               This means “for any single credit card transaction where the price of
                               the goods is known and the tax (based on destination of the goods)
                               is also known, then the total price of the goods plus the tax can be                      
                               charged to the consumer’s credit card and simultaneous payments        
                               to the merchant and the taxing authority can be made by the credit 
                               card company”. A paperless tax transaction is created.

Simplification
   Routing sales and use taxes to the government directly from the consumer at the point of sale reduces a complex operation to it’s simplest form. In addition, it completes the legal obligation of a consumer to pay use taxes on interstate purchases and the merchant is not relied on in any way to act as an intermediary to collect and pay over taxes. Our approach treats the taxing authority like any other merchant using the credit card system. Taxes are charged to a credit card, separated and paid to each taxing authority in lump sum daily payments by the credit card company.
   Most e-commerce merchants and catalogue companies already use sophisticated billing
software to control their sales activities. They also have available specialized sales tax computation software that for any address location and any class of goods can calculate taxes due and to whom. Our proposed system uses this very billing software (reprogrammed to split a credit card payment into two pieces *) and specialized tax software to pay sales and use taxes from the point of sale. Cash and check transactions
are treated in a similar fashion and will be explained later.                               *Pat. pending
              * * Merchant Swipes Card- Sales Tax is Electronically Paid **                    1           
This is How Our Typical Credit Card Transaction Will Flow
   
   A consumer either over the phone or the internet makes a purchase.
   
    The merchant enters the customer data and item data into the billing software.
    
    The billing software queries the specialized tax software that either resides in the
    merchant’s system or for smaller merchants accesses it via the Web as to the taxable             
    status of the transaction the tax software computes the sales or use tax due and reports     
    that amount back to the billing software.   
    
    The billing software adds the price of the goods plus the tax and via modem initiates a   
    credit card transaction.  The credit card company is instructed to charge the total                      
    amount to the consumers credit card and is separately instructed to pay the merchant     
    for his goods and the taxing authority for taxes due. The billing software must include  
    banking addresses of all relevant taxing authorities.  

    Each taxing authority receives one batch (lump sum) payment per day from any and  
    all consumers having goods shipped into that jurisdiction. Because of this standard      
    batch  process the identity of the consumer  or class of goods remains invisible to the
    taxing authority, which serves to protect the privacy of the consumer.

This is How Payments by Cash or Checks Fits Into Our System        
     
      We are suggesting the following method to electronically route taxes from the point          
    of sale when cash or checks are used. The merchant will take out a single credit card 
    in his own name for the sole purpose of charging tax payments to it. The merchant will                                                  
    imbed the credit card information into his billing software. When a consumer offers to  
    purchase by cash or check, the price of the goods plus the use tax is computed as done  
    above. The consumer is asked to remit the price plus the tax to the merchant. When the   
    merchant receives payment and ships he keeps the tax and charges it to “his” credit   
    card. This allows the tax to travel in real time. At the end of the month the credit card  
    company sends a single bill to the merchant for all of the tax it has already paid to a  
    multitude of jurisdictions. The merchant then pays the credit card bill with the funds he 
    has collected throughout the month. There is no additional reporting on the part of the 
    merchant.

Tax Computation Software
       Integral to our tax collection process is the use of tax computation software.
    Tax calculation software is available from several very reliable vendors and has been      
    used for many years by the nations largest interstate retailers and catalogue houses.
    Tax computation software interfaces with all large and mid-market financial  
    accounting packages. It operates by capturing data from the user’s billing module
    and then completes a tax calculation while taking into consideration all tax 
    jurisdictional issues, product exemptions and special tax rates. The smallest of  user
    can get any tax computation done via the Web.                                                              2
We Create A Paperless Sales and Use Tax Collection System
A combination of technology and software can now provide the means for a consumer to pay his use tax obligation directly to the taxing authority from the point of sale.  Use tax compliance has always been a burden on the merchant.  If any one merchant should adopt our system he will simply facilitate a tax transaction between the buyer and the government.  Because the merchant would no longer collect, hold or remit taxes, he would be forever relieved of all the reporting requirements he was previously subjected to.  There is no paperwork for the merchant and no paperwork for the government.

Audit
   The usual cumbersome audit function would now take place at the point of entry of goods into a taxing jurisdiction. Invoices or bills of lading attached to a parcel would be available for visual inspection at freight terminals. Parcels would be affixed with a tax paid stamp, mark, secured bar code or certification that would indicate that the tax obligations on the parcel are paid. The consumer will get his normal invoice indicating taxes paid. The merchant copy will indicate the taxes are paid by the consumer.

Security
   Transferring taxes through the credit card system is no different than any other of the
millions of purchase or financial transactions that take place in a “closed line”(telephone
or cable) system. Actually, most local retail charge transactions are taxed, however,
the tax flows to the merchant through the credit card system and is then manually paid over to the government. Our system pays the government directly through the credit card system.
 
International Issues
    Our system contemplates routing foreign tax payments through the credit card system as long as a compatible banking address is available and the tax computation software can calculate the tax. Another option would be to have any foreign country open a bank 
account in this country specifically for the purpose of receiving use tax payments. 
Consumers would be charged the use tax or vat tax based on the destination of the goods
and the tax would be routed to that country’s bank account wherever it was.

Benefits 
•	The merchant no longer collects, reports or remits taxes.
•	The government receives all use taxes due in real time and in a paperless format. 
•	Eliminates jurisdiction and audit problems associated with third party collection.
•	The consumer complies with use tax obligations.
•	Playing field is leveled and digital divide eliminated.
•	No expensive, complicated and ongoing third party administrators.
•	Merchants burden is significantly reduced below the impermissible levels put forth in “National Bella Hess” and “Quill”.
•	A one merchant pilot project can demonstrate feasibility.
•	Technology is readily available.                                                                              3
Criteria for Evaluation of Alternative Proposals

Simplification
1	By using readily available software and technology we cause the consumer to pay his own use tax  from the point of sale. The merchant by reprogramming facilitates this process. Legislative simplification regarding rates, definitions and exemptions would further serve to simplify the process.
   
   2    From an internal control standpoint it will be very difficult to accurately determine
         the source or destination of digital products or services. If such a methodology is 
         developed by using digital I.D.’s or other methods the tax computation software   
         companies would program the process into their products. 

   3    There are no more audits at the merchant location. The tax transaction is between     
         the consumer and the taxing authority. Physical inspection, spot checks, at the                         
         freight terminal would be one way to verify that taxes have been paid. A detailed       
         tax receipt would permit a computerized dial in look-up for tax verification.

Taxation
4    There is no imposition of  Internet access tax. There are no new taxes on Internet
      sales. This is a method to collect “old “ taxes. Legal use taxes that are presently
      unpaid by the consumer would be collected. Thus, leveling the playing field and
      eliminating the digital divide.

 5   In a revenue neutral situation any newly collected “old” taxes should serve to     
      reduce the burden on consumers that presently pay all their sales and use tax 
      obligations. We reemphasize that sales and use obligations are existing laws not 
      new obligations. Our system does not reduce or increase telecommunications taxes  
      or contemplate taxation of the internet itself or access to it.

 6  Our proposal does not impose any tax, license or reporting requirement, collection
     obligation or fees on anyone without a physical presence in any state. It does
     require all merchants with interstate sales activities to reconfigure their sales 
     software and tax software in such a way that it would facilitate the payment of tax
     directly from the consumer to the taxing authority. It would require all merchants
     without the necessary software to acquire it.

 7  Use of our system to collect interstate use tax would positively impact state and 
     local government.

Burden on Sellers 
8	Our entire system is designed to remove the burden of tax collection from all remote sellers. Eventually an expansion of our system could apply to all sellers.
There are no special provisions for small businesses. If they are not exempted from 
participation in our system, then the wherewithal must be acquired or provided                      to them.                                                                                                                  4 
                                                                                                                             
         Discrimination
                                                                                                                       
9	Our system does not discriminate against purchasers of like products or services      
and it does not discriminate on the basis of how people buy.

10	There is no discrimination against out of state merchants. The tax system and the
taxes collected treat all parties equally. 

International
    11  If a system such as this were made to function internationally any sales, use or    
          VAT tax would be paid by the consumer at a rate based on the destination of 
          the merchandise. Since the tax is destination based there would be no advantage to
          shopping in one country or the next. If certain countries chose to collect taxes at
          at the source and not at the destination then competitive advantages begin to 
          appear. 
     
    12 The conceptual tax collection process here is simple and the technology to create a      
tax / credit card payment deliverable anywhere is also possible. As mentioned before any country can open a bank account in any other country to receive it’s
taxes. The TaxNet process has no national boundary.

13	Any transaction tax system whether sales, use or VAT tax can make use of our system. A source based system can be compared to what exists in any state on a local (intrastate) basis. The tax is collected and remitted into the state in which the 
transaction originates.

 Technology

14	Yes, the proposal is feasible utilizing available software and electronic payments 
via the credit card system. We have already provided extensive discussion as to
how the system operates. The initial costs to reprogram billing software and 
interface it with the tax computation software would vary from merchant to 
merchant. Those merchants using a widely available accounting package would
go as a group to their software vendor and have modifications performed that
would generically be sold to all as an update. Thus defraying the cost over many.
Similarly, all new software packages sold would have this particular tax feature    
          built in, probably with minimal cost. Those merchants with older custom (legacy)
          systems would have to retain their software consultant or engineer to do the
          reprogramming. As updates come out it would be at minimal cost to the
          merchant. There are great cost savings to be realized by the merchant by being
          relieved of the tax collection and reporting function and the government will
          also receive a substantial amount of new tax revenue. Who pays for this  is not our 
          provenance to say.                                                                                                     5

                                                                                                                                          
 Privacy  
     
    Credit card transactions by their nature are processed in batch. Settlement of a days 
          credit card transaction activities results in a deposit of one total amount into an
acquiring bank (government bank). The details of the total amount, the type
of goods purchased and the identity of the consumer are not provided. It may be possible that the credit card company could provide activity reports by merchant location to the government if necessary.

 Sovereignty/Local Government Autonomy

15	Because the software and technology employed can recognize any taxing
jurisdiction and access taxes thereto the various states and taxing jurisdictions
retain their right to impose taxes and govern themselves.

16	The software and technology allow any rate of tax to be used by the system.

 Constitutionality

17	Our system removes any obligation on the part of the merchant to collect and
remit sales and use taxes to remote states. The merchant’s burden is reduced
to the act of facilitating a use tax payment directly from the consumer to the 
government. Another burden on the merchant may be the cost of  software
or software modification. On the other hand, the cost savings generated by
no longer having to report or collect taxes may exceed this initial cost outlay
or burden. The government also may concede to pay all or part of the cost of  the initial software and modification.  
 
          Our system of collecting interstate use taxes where no nexus exists is unique and 
          untested by the courts. Therefore, there is no way to know whether enough burden
          has been removed from the merchant so as to allow our system to be considered 
          constitutional.

  Credit card fees
            Every credit card transaction carries a fee (about 2%). A good portion of this fee   
          is for the advancement of funds in real time to the merchant. The balance of the fee     
          is for the processing company that actually makes the transaction happen. This  
          credit card fee can be reduced if the merchant chooses to receive his payments 
          with a time delay. This also would apply to any taxing authority receiving 
          payment with a time delay. 
             Presently, about 40% of all sales taxes collected are charged on credit cards and
          paid to the merchant. In total, merchants are paying significant fees to collect sales    
          taxes on behalf of the government. Our system shifts this burden to the 
          government.                                                                                                              6
                                                                                                                                           
Proposed Pilot Project
    We would like to offer our system for use in a pilot project in this format:
A managing consultant will locate a suitable merchant(s) to participate in a project
that will eliminate sales and use tax reporting on interstate sales activity. This merchant
should sell via the internet and or direct mail and should ship it’s products into at least 3 to 5 taxing jurisdictions where it maintains a presence other than it’s main location.    
Possibly the Northwest Sales Tax Pilot Project could help. A merchant with a presence
in Canada could also be used. The managing consultant could also use a fictitious merchant for demonstration purposes.

     Under the guidance of the managing consultant the merchant(s) would open enough bank accounts to correspond with simulated taxing jurisdictions. The merchant would contact his software vendor and set up a parallel system for a fixed period of time. The parallel system would be reprogrammed to route the remote taxes off the credit cards into their respective bank accounts (the accounts representing some future government bank account).

     The managing consultant would report back the speed of implementation, costs,
problems encountered and benefits to the merchant and government on those transaction. During and at the end of the project all funds used revert to the merchant.   

The Future is Total Simplification of All Sales and Use Taxes
     Soon, multiple payments from the point of sale to all parties of a single credit card transaction will be common such as; sales commissions, auction fees, insurance, taxes,  freight charges and vendors.-Pat.  pending 
        
    The TaxNet project envisions that all transaction taxes whether remote or local will
be paid to the government from the point of sale. This includes taxes charged to a credit       
card and taxes due on cash transactions. Local credit card transactions would have the
local tax rate(s) imbedded into the credit card terminal or other device. Each transaction
would be separated into two parts. The credit card company paying the merchant his amount for the goods and also paying the tax to the government in the same manner as
interstate transactions.    
      Cash Transactions will have the tax amount collected by the merchant evidenced
to the consumer by an online receipting device (tax register). A comparison can be made        
to a lottery machine issuing an on line receipt for each ticket sold. The tax register is online to a governmental authority that tabulates the day’s sales taxes collected. The governmental authority either charges the day’s taxes collected  to the merchant’s credit card account or initiates an electronic funds transfer to charge the merchant’s bank account. Thus, for every cash transaction where a consumer takes an online receipt the tax liability becomes known and the funds are electronically collected.   
      Once the true tax liability is know by simple division the gross cash receipts of any 
business becomes apparent. The TaxNet system will prevent underreporting of income on cash transactions and levels the playing field of those who deal in cash transactions and those who don’t. The IRS attributes a $75 billion annual loss of tax revenue to underreporting of income.                        Pats. 5,799,283 and 5,875,433, others pending                                  7