E-Commerce Commission Report Calls for Nexus Clarification

Arlington, VA - April 17, 2000 - The Advisory Commission on Electronic Commerce's Report to Congress has stimulated the introduction of bi-partisan legislation that would prevent states from forcing out-of-state businesses to collect sales tax on their behalf. Introduced to Congress last week, the "New Economy Tax Simplification Act" is sponsored by Senators Judd Gregg (R-NH) and Herb Kohl (D-WI), and already has been referred to the Senate Finance Committee.

"Our bill goes directly to the heart of the Internet tax debate," stated Senator Gregg. "It provides clear rules of the road for all parties involved. It sets up clear nexus standards for the 21st century."

The Commission's Report, that includes both recommendations which received two-thirds of the Commissioners' support as well as majority vote policy proposals, was submitted to Congress April 12. The Report emphasizes the need for clarification of nexus standards in a cyber economy that is driving new business models and blurring old tax rules. Nexus standards refer to the activities a business undertakes within a state that would obligate a business to collect and remit that state's sales taxes.

"As the physical and cyber worlds converge, the lack of any clear nexus standards has created a great deal of uncertainty for both business and tax administrators, which will likely lead to future disputes and costly litigation," said Commissioner Ted Waitt, chairman of the board, Gateway, Inc., in his letter included in the Commission's Report.

"Under the guise of 'protecting Main Street retailers,' state and local governments are urging Congress to force Internet sellers to collect sales taxes wherever their customers are located," said Dean Andal, Chairman of the California State Board of Equalization and the Advisory Commission member who proposed clarifying nexus standards during Commission proceedings. "Congress is being asked to pass the equivalent of a $4.5 billion tax increase on consumers when 72 percent of Americans polled this month oppose such taxes. It would also force Internet sellers to keep track of taxes in over 30,000 local tax jurisdictions, and file tax returns and be audited by states and localities they have never visited."

The Commission's Report notes the lack of clarity and uniformity in current tax rules and questions the current ad hoc system that determines each business' nexus. To address these concerns, the Commission spelled out a set of "bright line" factors that would not constitute nexus for either a small business or a large retailer's "dot-com" subsidiary, such as maintaining a Web site on equipment in a state or having customers in a state.

"In order to be fair to small businesses reaching out for the first time into a global marketplace, entrepreneurial startups, and even larger retailers with 'dot-com' subsidiaries - the Report calls for clear and uniform tax rules to facilitate growth of electronic commerce," Commission Chairman and Virginia Governor Jim Gilmore said. "We should do everything we can to encourage small businesses to get on the Internet, not throw burdensome tax and regulatory obstacles in their way. The growth of this industry means greater productivity for businesses and more jobs for people."

Responding to the charge that state and local governments will suffer if they cannot tax all Internet purchases, Andal said, "There is no evidence that e-commerce threatens adequate revenues for government services. Nor does the rise of e-commerce threaten small businesses. The Internet is the one place where small entrepreneurs can compete on equal footing with major corporations." Mr. Andal stated that California, with the most e-commerce friendly tax laws in the nation, had sales tax revenue growth of one third in less than five years. According to Andal, this extraordinary increase in sales tax revenue came from traditional retailers of goods, despite Californians' huge appetite for Internet purchasing.

For more information about the Commission, its meetings, or to view its Congressional report, the public may visit the Commission's Web site at http://www.ecommercecommission.org.

About the Advisory Commission on Electronic Commerce

Appointed by Congress in October 1998 as part of the Internet Tax Freedom Act, the 19-member Commission has been tasked with studying the impact of federal, state, local, and international taxation and tariffs on transactions using the Internet and Internet Access. The Commission's recommendations are due to Congress no later than April 21, 2000.