Michael O. Leavitt Center for Politics & Public Service

Governor Leavitt assumed office in January, 1993, a pivotal time in history when the forces of globalization and the opportunities presented by the electronic highway were just being recognized. In his inaugural address, Governor Leavitt noted the challenges and opportunities presented by the changing economy and invited Utah citizens to join him in meeting those challenges.  Just a few months before, the United States Supreme Court, in Quill v. North Dakota, had decided a case that would have tremendous impact on the retail industry, as it grew and changed under the forces of electronic commerce and globalization.  The Quill Company was actually a fairly traditional mail order retailer. It sold office supplies through its catalogue. And it sold a lot of office supplies.  Quill did not have a store or warehouse in North Dakota and, according to prior Supreme Court precedent, National Bellas Hess, it did not believe it should be required to collect sales tax for North Dakota on goods that it sold in the state. North Dakota, on the other hand, believed that both the mail order industry and federal case law on interstate commerce had changed in the twenty-five years since National Bellas Hess had been decided and, with the advent of computers and the growth of interstate sales, it was no longer appropriate for Quill to avail itself of the North Dakota market without collecting sales taxes that competing North Dakota merchants would be required to collect. The Supreme Court split the baby. It overturned the part of National Bellas Hess that said it was a violation of due process for a state like North Dakota to impose a tax collection burden on an out-of-state retailer.  In other words, the Court acknowledged that it would not be fundamentally unfair to make Quill collect the tax.  They upheld the part of National Bellas Hess, however, that said the collection requirement would “unduly burden interstate commerce.” In so holding, it appears that the Court was not overly concerned with North Dakota’s particular law. What was “more significant [was] that similar obligations might be imposed by the Nation’s 6,000-plus taxing jurisdictions” and that ‘“many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle a [mail-order house] in a virtual welter of complicated obligations. ’”3 By limiting their decision to the Commerce Clause, the Court essentially invited Congress to determine the appropriate balance between the legitimate needs of interstate commerce and fairness for Main Street retailers. Within a few years, it became apparent to Governor Leavitt and other perceptive observers that Quill, which was a minor irritant for states when limited to traditional catalogue merchants, could become a catastrophic when applied to the burgeoning forces of electronic commerce and globalization.

About the time of Governor Leavitt’s inauguration, internet was becoming a unbiquitous presence in the lives of Americans.  The growth of electronic commerce was anticipated to eclipse the growth of normal “bricks and mortar” retail activity. Noted economists and like Lester Thurow and Austin Goolsbe were predicting that half the store-fronts on main street would be vacant by 2010. Many people thought the convenience, selection, and economies of scale available to electronic retailers would drive traditional retailers out of business. That eventuality would have profound impact on state and local tax revenues. Utah has a fairly balanced tax system in many ways. It has a property tax, which is a tax on wealth.  That tax is imposed on wealth.

It is assessed by County Assessors and collected by County Treasurers.  The taxpayer receives a bill each year for his or her tax, without any effort on the taxpayer’s part.

The state has an income tax, which is a tax on income. Although much of the tax is collected by employers through wage withholding, the income tax is essentially “self-assessed.” Each taxpayer files his or her own tax return every year, declaring income and computing the tax due.

The state also has a sales tax, which is a tax on consumption.  That tax is computed and collected largely by retail businesses in Utah, who collect six or seven cents on every dollar of taxable sales they make within the state.

If the retailers are out-of-state retailers, Quill says they don’t have to collect Utah sales tax on sales to Utah customers. This has profound implications for Utah’s tax base. It is true that there is a compensating use tax in Utah; that is, if a seller fails or is not required to collect the sales tax on a taxable sale, the owner of the property is nevertheless subject to a compensating use tax.  The state is quite successful in collecting that tax from large, sophisticated businesses.  They understand their obligations, there is wide audit coverage, and they accrue and pay their own use tax on a regular basis.  The situation is quite different, however, for individual citizens’ purchases for personal consumption.  Of course, there are a few thousand knowledgeable and honest taxpayers who do accrue and report use tax on their individual income tax returns. In 2000, for example, about 4,000 individual returns reported about $205,000 in use tax.  The next year, about 5,500 returns reported a total of almost $250,000 in use tax. Most individuals, however, do not understand or comply with their obligations. The returns reporting use tax comprise less than ½ of 1% of all individual returns filed. And, because the number of taxpayers is large and the amount of tax that would be due from any individual taxpayer is small, there has been little audit coverage in the area. Indeed, given the numbers, an intensive audit effort would only be cost-effective if it had an in terrorem effect on the rest of Utah’s citizens.4 Moreover, income tax audits, which focus primarily on income and deductions that a taxpayer voluntarily chooses to claim are intrusive enough.  A use tax audit that focused entirely on personal consumption would be viewed by many as a significant and unwarranted invasion of privacy. Under those circumstances, a migration of a significant portion of Utah retail sales from local retailers who collect the Utah sales tax to internet retailers who do not collect the tax would have a potentially devastating effect on Utah’s budget.  We have briefly described Utah’s tax structure above. The income taxes are constitutionally dedicated to education. The property taxes are dedicated primarily to local governments and the school fund.  Gasoline taxes are dedicated to highway and road funding.  The sales tax provides virtually of all the state source revenue that goes to the general fund. There is also a multiplier effect at work.  Internet retailers may or may not be able to compete effectively with local retailers based on their business models. But if customers perceive they can save 6 or 7% of the purchase price by avoiding sales tax, the competitive advantage is even greater.

There is simply not a level playing field between bricks and mortar and internet retailers.

This competitive disadvantage drives more customers to the internet and reduces sales tax revenues even more.

It was in this environment, and with this realization, that Governor Leavitt addressed the annual meeting of the Multistate Tax Commission in Dana Point, California. He outlined the challenges facing the sales tax and the competitive disadvantage that burdened Main Street businesses. He noted that the issue was very simply whether or not the sales tax would remain a viable source of revenue for state governments in the 21st Century. He challenged the states to work together to simplify their sales tax systems, in the hope that the burden on interstate commerce presented by the current morass of thousands of jurisdictions with their own tax bases, rates, exemptions, and procedural requirements could be dramatically reduced. With dramatic simplification, in would not be unreasonable for Congress to determine that a collection requirement could legitimately and appropriately be imposed on an internet retailer exploiting the market of a state. The states of Idaho, Utah and Washington took up the challenge. Val Oveson, Chair of the Utah State Tax Commission, Mike Southcombe, Chair of the Idaho State Tax Commission, and Fred Kiga, Director of the Washington State Department of Revenue agreed to commence the Northwest Regional Sales Tax Project.5 Structure of the Project The states immediately recognized the necessity for input from business leaders. Various businesses were identified that were thought to be progressive in outlook, innovative in marketing and that did business in at least two of the three states.  Representatives of these businesses were invited to participate in focus groups held in the various states, Seattle on November 4, 1998, Salt Lake City on November 9, 1998, and Boise on November 23, 1998. Many of those business leaders, recognizing the benefits that could accrue to all parties from a better sales tax system, agreed to participate. Thus, the Northwest Regional Sales Tax Pilot Project was established as a public/private partnership. A partial list of the participating business representatives in attached as Appendix A to this report.  Invaluable technical and strategic assistance was provided by Dan Bucks of the Multistate Tax Commission and Harley Duncan of the Federation of Tax Administrators and their staff. The first regional meeting was held December 15, 1998, in Salt Lake City. At that meeting, three task forces were established, one on tax rates, one on tax base and one on filing and procedure. In keeping with the public/private partnership focus, each task force has a government and an industry co-chair.

Recognizing the importance of technology in sales tax compliance and administration, a technology task force was later added. The task forces engaged in numerous conferences, both in-person and by telephone. Additional regional meetings, where the progress of the task forces was reported and overall strategy was discussed, were held in Boise on April 22, 1999, Seattle on May 17,1999, Post Falls, Idaho on August 27,1999, Salt Lake City on October 5, 1999, and Seattle on February 24, 2000. The rate task force substantially completed the work assigned. The tax base task force, on the other hand, recognized that the exemption issue merited its own task force. Accordingly, the rate task force was replaced by a resale and exemptions task force. The Mission of the Project Much of the then current discussion on sales tax simplification had been focused on the internet and other forms of remote commerce. Concern by traditional retailers about competition and by states about potential revenue losses motivated those discussions.  Early on, however, the Project recognized that remote commerce is only part of the problem. In fact, the sales tax systems of the various states are too complex for all taxpayers.Those taxpayers who currently have taxable nexus with the participating states have existing problems that must be addressed, regardless of the ultimate resolution of any e-commerce issues. Accordingly, the Project aimed at simplifying the sales tax for all stakeholders, as set forth in its Mission Statement: Develop a fair, simplified sales tax system that works well in all major marketplace circumstances for sales and use taxpayers doing business in the tri-state region. Accomplishments The accomplishments were many and varied. Some were intangible.

• • Relationships. One of the most striking outcomes of the Project was the high level of cooperation and communication that developed between the government and business participants. At the outset, many government representatives had only a vague idea of the practical difficulties of compliance.  After the Project, those representatives had a much greater awareness of the difficulties many retailers face in complying with the sales tax. This knowledge later informed the structure and function of the Streamlined Sales Tax Project.

Similarly, some business representatives did not understand why some government processes were helpful or necessary.  Much information was shared and both government and business representatives have a clearer idea of the challenges facing the other.

Moreover, all representatives came to view the issue as a joint problem that can only be solved cooperatively.

• • Research and development. The participants conducted extensive research and fact finding into the sales tax systems themselves and into taxpayer and third-party compliance systems. This research was critical in developing the concept of a “trusted third party” who could relieve the retailer of many of the obligations of collecting and remitting sales tax. This concept was later incorporated in the National Governor’s Association proposal to the Advisory Commission on Electronic Commerce which, in turn, became the Certified Service Provider, a centerpiece of the Streamlined Sales Tax System.

• • Combined EFT in Idaho and Utah. One of the very practical difficulties taxpayers face is the varying requirements for electronic funds transfers in payment of tax liabilities. Utah and Idaho, who currently use a common EFT vendor, were able to work together to allow “one stop shopping” for both states. Thus, a taxpayer can authorize EFT’s to both states with a single contact.

• • Washington’s combined exemption certificate. Washington had recently inaugurated an Electronic Filing System (“ELF”) for its excise taxpayers.  That system predated the Project, but has now been augmented by a combined exemption certificate that will simplify compliance for all of Washington’s excise taxpayers, including its ELF filers.

• • Idaho’s electronic filing system.  Idaho, after viewing Washington’s ELF system and other presentations from third-party vendors, initiated its own electronic sales tax reporting system. Idaho’s extensive work on the technology task force was the decisive element in this decision.

• • Legislative support. All three states have received the support of their legislatures, as indicated by passage of the following bills:

1. 1. Utah Senate Bill 178 (1999).

This bill authorized the Utah State Tax Commission to participate in the Project.

1. 1. Idaho House Bill 354 (1999). This bill authorized the Idaho State Tax Commission to participate in the Project.
   2. Washington House Bill 2493 (2000). This bill represents one of the most practical and concrete accomplishments of the Project. Given the current reality of multiple local tax rates, taxpayers have had extreme difficulty keeping up to date on changes in rates and jurisdictions. Under the law as now amended by this bill, local sales tax bases and rates may change only four times a year, with at least 75 days notice to the Department of Revenue of such changes.  This limitation applies whether the changes occur as a result of ordinances or annexation. Thus any Washington taxpayer will have a single source for researching all such changes and must make the inquiry only four times a year. Moreover, if there are changes, taxpayers will have adequate time to change their systems to comply.
   3. Utah Senate Bill 209 (2000). This bill is functionally identical to Washington Bill 2493 and arose out of uniform legislation proposed by the Project. As such, it gave the same protections to Utah taxpayers that Washington taxpayers will now enjoy. (Idaho is virtually a one-rate state and, accordingly, did not need such legislation.)
   4. Utah Senate Bill 172 (2000). This bill provided a single statewide sales tax rate that retailers may collect if they have no nexus with the state.

In return for voluntary collection at that rate, retailers received protection from audit exposure if they were ultimately found to have nexus. Such retailers could be fully compliant with Utah sales tax law by filing a single return for each period, with a single tax base and a single rate.

Although the new law provided no immediate benefit to Project participants, most of whom have nexus in Utah, passage of the bill represented the Legislature’s support for Project initiatives and its increasing willingness to address the complex issues surrounding sales tax simplification.

• • Conclusion.

The Northwest Project broke important ground in business-government cooperation in addressing the difficulties of sales taxation of interstate commerce. It laid the groundwork for national initiatives that would follow. The Project ended, not because its work was done or because any of the participants lost enthusiasm for the work.

• • Background. The Advisory Commission on Electronic Commerce was established pursuant to P.L.  105-277, Div C, Title XI Stat. 2681-719, and codified as 47 U.S.C.S. § 151 -5ec.  1102 (H.R. 4328) (referred to herein as the “Internet Tax Freedom Act” or the “Act”).  As set forth in the Act, the Commission’s statutory mandate is to study “federal, state and local, and international taxation and tariff treatment of transactions using the Internet and Internet access and other comparable intrastate, interstate or international sales activities.” The Act required the Commission to complete its study within 18 months and transmit its findings, including any legislative recommendations, to Congress.

The Advisory Commission on Electronic Commerce met in four in- person meetings: Williamsburg, Virginia; New York City, New York; San Francisco, California; and Dallas, Texas. At its final meeting in Dallas on March 20 and 21, 2000, the Commission voted on a number of proposals bearing on the subject of the Commission’s charter. Certain of those proposals received a 2/3rds vote and, pursuant to the statute, represent findings and recommendations of the Commission. Other proposals, including those pertaining to state sales and use taxes, received a majority vote of the Commissioners and are identified as such throughout the report. Under the terms of the statute, those proposals do not constitute formal findings or recommendations of the Commission.

• • Membership. The Act directed Senate and House leadership to appoint 19 commissioners including: the Secretary of Commerce, the Secretary of the Treasury and the United States Trade Representative (or their respective delegates), eight representatives from state and local governments (including one from a state or local government that does not impose a sales tax, and one representative from a state that does not impose an income tax), and eight representatives from the e-commerce industry (including small businesses), telecommunications carriers, local retail business and consumer groups.

1. 1. The Honorable James S. Gilmore, Governor of the Commonwealth of Virginia (Chair of the ACEC).
   2. The Honorable Dean F. Andal, Chair, California Board of Equalization.
   3. Mr. C. Michael Armstrong, Chairman of the Board, AT&T

1. 1. Mr. Joseph H. Guttentag, Senior Advisor to the Assistant Secretary for Tax Policy, U.S. Department of the Treasury
   2. The Honorable Paul C. Harris, Sr., Delegate, Virginia House of Delegates.
   3. The Honorable Delna L. Jones, Commissioner, Washington County, Oregon. (Oregon is a state that does not impose a sales tax.)
   4. The Honorable Ron Kirk, Mayor, City of Dallas.  (Texas is a state that does not impose a traditional income tax.)
   5. The Honorable Michael O. Leavitt, Governor, State of Utah.
   6. Mr. Gene N. Lebrun, President emeritus, National Conference of Commissioners on Uniform State Laws.
   7. The Honorable Gary Locke, Governor, State of Washington. (Washington is a state that does not impose a traditional income tax.)
   8. Mr. Grover C.  Norquist, President, Americans for Tax Reform.
   9. Mr. Robert T. Novick, General Counsel, U.S. Trade Representative
   10. Mr. Richard D.  Parsons, President, Time Warner Inc.
   11. Mr. Andrew J. Pincus, General Counsel, U.S. Department of Commerce.
   12. Mr. Robert W. Pittman, President & Chief Operating Officer, America on Line.
   13. Mr. David S. Pottruck, President & Co-Chief Executive Officer, Charles Schwab Corporation.
   14. Mr. John W. Sidgemore, Vice Chairman MCI Worldcom and Chairman, UUNET Technologies.
   15. Mr. Stanley S. Sokul, Uniform Independent Consultant, Association for Interactive Media.
   16. Mr. Theodore W. Waitt, Chairman, Gateway, Inc.

It is not clear who was intended to represent local retail business. It became clear in the course of the Commission’s deliberations that that segment of the business community was simply not represented on the Commission. Similarly, consumer groups were not actually represented.

Mr. Norquist may have been intended to fill that role, but his organization purports to represent taxpayers as taxpayers, rather than as consumers.

• • Formal Findings and Recommendations. Pursuant to the operating rules of the Commission, any findings and recommendations needed a two-thirds vote to be adopted. The following recommendations received the requisite support.

1. Digital Divide

• • Clarify federal welfare guidelines expressly to permit the states to spend Temporary Assistance to Needy Families Program (TANF) surpluses (unobligated balances) to provide needy families access to computers and the Internet, and to provide training in computers and Internet use.
  • Encourage states and localities to partner with private technology companies to make computers and the Internet widely accessible for needy families, libraries, schools, and community centers and to train needy families how to use computers and the Internet. Incentives for these partnerships may include:
  • Federal and state tax credits and incentives for private technology companies that partner with state and local governments; and Federal matching funds for state and local expenditures.
  • Encourage the Administration and Congress to continue gathering data for empirical research that will inform federal, state and local policymakers on measures that will lead to the reduction, and eventual elimination, of the Digital Divide by empowering families in rural America and inner cities to participate in the Internet economy.

2. Privacy Implications of Internet Taxation

• • Explore the privacy issues involved in the collection and administration of taxes on e-commerce, with special attention given to the costs that any new system of revenue collection may have upon other values that U.S. citizens hold dear, and he steps taken in systems developed to administer taxes on e-commerce to safeguard and secure personal information.
  • Take great care in crafting of any laws pertaining to online privacy (if any such laws are necessary), because policy missteps could endanger U.S. leadership in worldwide e-commerce.

3. International Taxes and Tariffs. Support implanting and making permanent a standstill on tariffs at the earliest possible date.

• • Majority recommendations. There were also several recommendations that received a majority of support, but not the requisite supermajority to be considered recommendations of the Commission.  Typically, these items were supported by the business representatives (Messrs. Armstrong, Parsons, Pittman, Pottruck, Sidgmore, and Waitt, the Virginia state and local government representatives (Messrs.

Gilmore and Harris), the California representative (Mr. Andal), and the the tax limitation representatives (Messrs. Norquist and Sokol). The federal government representatives (Mssrs.

Guttentag, Novick and Pincus) abstained. The remaining delegates (Messrs. Jones, Kirk, Leavitt, Lebrun, Locke opposed the recommendations. Some of the reasons for this opposition is set out in each section as “Commentary.”

1. Sales and Use Taxes.

• • For a period of five years, extend the current moratorium barring multiple and discriminatory taxation of e-commerce and prohibit taxation of sales of digitized goods and products and their non-digitized counterparts.
  • Clarify which factors would not, in and of themselves, establish a seller’s physical presence in a state for purposes of determining whether a seller has sufficient nexus with that state to impose collection obligations.
  • Encourage state and local governments to work with and through the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) in drafting a uniform sales and use tax act that would simplify state and local sales and use taxation policies so as to create and maintain parity of collection costs (net of vendor discounts) between remote sellers and comparable single-jurisdiction vendors that do not offer remote sales.
  • Establish a new advisory commission responsible for oversight of the progress of NCCUSL’s efforts to create a uniform sales and use tax act.

Commentary: Governor Leavitt opposed this proposal because both the existing moratorium and any extension of the moratorium are infringements on state sovereignty.  The right of a state to determine its own tax base and collect its own taxes is essential to the right of self government. Although the states need to be cognizant of the impact their tax collection policies and practices have in the real world, the decision should ultimately rest with each state. Governor Leavitt believed that taxation of access services was not in the best interest of the state or its citizens. Broad and unfettered access to the internet will foster educational pursuits and will enhance a citizen’s access to necessary information, as well as business and governmental services. Studies have shown, however, that states that do tax access services do not experience any overall reduction in internet usage. Accordingly, these decisions are best left to each state and its elected leadership. 2.  Business Activity Taxes.

• • Clarify the circumstances that determine whether a seller has sufficient nexus with a state to be required to meet business activity and income tax reporting and payment obligations for that state.

Commentary: Governor Leavitt vigorously opposed this proposal as an infringement on state sovereignty and because it has serious implications for tax fairness and equity. Governor Leavitt would agree that clear standards are appropriate.  It is only fair that a business know, with some certainty, at what point their activities would subject them to tax in any state.6 Unfortunately, the proposal is, in fact, shorthand for a “physical presence” test that has been proposed by various members of the business community for several years. Under that proposal, a business would not be subject to a state’s tax if it did not have a bricks and mortar presence in the state.7 Thus, a credit card company with thousands of Utah customers who used that credit card in millions of Utah purchases would not be subject to any Utah tax. Such a business, of course, is competing head-to-head with a Utah bank that is providing identical services and is also paying Utah income tax. Similarly, an internet electronics firm or bookstore could make millions of dollars of sales into Utah and not be subject to Utah tax.

(As noted above, those entities are already protected from any obligation to collect Utah sales tax because of Quill v. North Dakota.) Retailers already have some protection from the income tax obligation under Pub.L. 86-272. This federal law, however, is itself an unwarranted intrusion on state sovereignty and results in an unlevel playing field between Utah businesses and out-of=state businesses exploiting the same market. All of the “nexus clarification” proposals in recent years that have been proposed by business interests would expand the protections of Pub. L. 86-272.

This proposal is frequently brought forth by segments of the business community when significant progress is being made on other fronts. The National Tax Association, for example, conducted a Communications and Electronic Commerce Tax Project, co-chaired by Dr. Gary Cornia, Brigham Young University, and Ms. Kendall Houghton, Alston & Bird. The project had several business representatives and government representatives, including Richard B. McKeown, then Chair of the Utah State Tax Commission, Tim Sheehan, as Governor Leavitt’s representative, and Roger Black, representing Salt Lake City. Significant progress was being made, including a tentative agreement from the local government representatives to accept one sales tax rate per state (which is the Holy Grail for many interstate retailers.) Before agreement could be reached on the sales tax issues, however, business activity tax limitations were proposed which effectively derailed the negotiations.8 Similarly, if this issue had been isolated, it is possible that some consensus could have been achieved on other majority proposals. The business representatives, however, agreed to an all-or-nothing approach. Thus, the potential for agreement on telecommunications tax issues, for example, was lost because of the insistence on nexus clarification. 3. Internet Access.

• • Make permanent the current moratorium on any transaction taxes on the sale of Internet access, including taxes that were grandfathered under the Internet Tax Freedom Act.

Commentary: Governor Leavitt opposed this proposal primarily because of the state sovereignty issues outlined above.  4. Taxation of Telecommunications Services and Providers.

• • Eliminate the 3% federal excise tax on communications services.
  • Eliminate excess tax burdens on telecommunications real, tangible and intangible property.
  • Afford similar treatment of telecommunications infrastructure in states that exempt purchases of certain types of business equipment from sales and use taxes.
  • Encourage state and local governments to work with and through NCCUSL in drafting a uniform telecommunications state and local excise tax act, within three years, that would require states to follow one of two simplified tax structure models.

Commentary: Governor Leavitt supports simplification of the tax structure generally. He would also support voluntary efforts by NCCUSL or other groups to propose model legislation. Any proposal that would require states to adopt the proposal, however, or even one of two proposals, intrudes unduly on state sovereignty. 5. International Taxes and Tariffs.

• • Tariffs.  Support the formal, permanent extension of the World Trade Organization’s current moratorium on tariffs and duties for electronic transmissions.
  • International taxes on goods and services.
    • • Recognize the OECD’s leadership role in coordinating international dialogue concerning the taxation of e-commerce; affirm support for the principles of the OECD’s framework conditions for taxation of e-commerce; and support the OECD’s continued role as the appropriate forum for (1) fostering effective international dialogues concerning these issues, and (2) building international consensus.
      • Encourage and support (including adequately funding) the U.S. Government’s efforts to further international dialogue concerning the taxation of e-commerce, which are consistent with the principles outlined above.
      • Refrain from adopting legislative proposals affecting international transactions or activities that are inconsistent with the principles enumerated above.

Commentary: Governor Leavitt recognizes that U.S. business generally, and Utah businesses specifically, need to be able to compete on an equal basis in international commerce. International standards can help achieve this result if carefully formulated and judiciously applied. Just as Governor Leavitt is unwilling to cede control over Utah’s tax policies to the federal government, however, he is also unwilling to cede control to a multinational organization such as the OECD. The dialogue is appropriate. Any particular proposals that emerge, however, would have to be judged on their merits. 6. The Need for Improved Knowledge of International Ramifications. Congress should increase its oversight of the international ramifications of domestic Internet commerce decisions.  Commentary: Congress should undoubtedly increase its understanding of the international ramifications of its own policies and directives. States, also, should increase their understanding of the world in which their taxpayers compete. Congressional oversight, however, is a broad concept that can be readily abused. Whether or not such oversight is appropriate in any particular circumstance must be determined on a case-by-case basis. Governor Leavitt’s Personal Statement on the ACEC. Each Commissioner was allowed to include a personal statement in the report to Congress. Governor Leavitt’s statement not only commented on the activities of the Commission, it also contained a blueprint for going forward. Because that blueprint was actually implemented in the form of the Streamlined Sales Tax project, discussed below, a copy of the statement is included here in its entirety. The personal statements of the other Commissioner are available in the Commission report, attached as Appendix __.

Personal Statement of Governor Leavitt: “When I accepted a seat on the Advisory Council on Electronic Commerce (ACEC) I did so with the expectation that I would be helping to create an environment that fosters innovation and technological advancement.  Internet commerce, particularly the business- to-consumer end of it, has been one of the driving factors in the commercial revolution that continues to fuel our unprecedented economic prosperity.  “The foundation of this environment is a level playing field for all. What I, and a majority of my fellow Commissioners, favored is really very basic – tax equity across all retail channels of distribution. No matter where a product is bought – over the Internet, in a store or through a catalogue – they should be taxed in an equitable manner.  “A fair tax system should strive for neutrality, uniformity and simplicity. Moreover, government should keep the tax and administrative burden on business and consumers as low as possible.. One of the most critical questions we all have to struggle with is whether the sales tax is or can be violable for this new century and new economy. Because, if it cannot be made to work in a fair and equitable manner, then the failure would have significant consequences for the future of state and local property and income taxes.  “Media reports suggest that the Commission was wracked by dissention over this very serious issue.  Quite the opposite was the case. A majority of my fellow Commissioners recognized the need for both a level playing field and for radical simplification of state sales tax systems.
“The final vote to send this flawed report to Congress could not have been closer – 10 to 8 in favor. It highlights the important fact that had even one retailer been represented at the Commissioner level – the ACEC would have benefited from this knowledge and it is likely that consensus would have been reached. “Even still, we came very close to reasonable compromise. Under the alternative plan supported by at least eight Commissioners, states and localities agreed to undertake an extensive and comprehensive plan to simplify antiquated states sales and use tax systems in exchange for the clear right to collect these taxes.

“The simplification process endorsed by these eight Commissioners presented the states and localities with enormous challenges. However, we believe this issue is vital – and we were and are willing to undertake the hard work needed to achieve much-needed simplification procedures if the states are given the right to have remote sellers collect use taxes.  “The requirements for a simplified sales and use tax system include, but are not limited to:

• • Centralized, one-stop registration system
  • Uniform tax base definitions
  • Uniform, simple sourcing rules
  • Uniform exemption administration rules (including a database of all exempt entities and removal of “good faith” acceptance rule)
  • Appropriate protection of consumer privacy
  • Methodology for certifying software used in the sale tax administration process for tax rate and taxability determinations
  • Uniform bad debt rules
  • Simplified, consistent tax returns and remittance forms
  • Consistent electronic filing and remittance methods
  • State administration of all state and local sales taxes
  • Uniform audit procedures
  • Reasonable compensation for remote sellers
  • De minimis threshold below which small business remote sellers would not be required to collect use tax

“To implement this streamlined sales tax system, we recommend that Congress enact legislation authorizing states to develop and enter into an Interstate Sales and Use Tax Compact by December 31, 2003. The legislation should provide that states joining the Compact will be required to adopt a simplified sales tax system addressing the criteria outlined above. States adopting the simplified system would be authorized to require remote sellers above the sales volume threshold to collect use tax on all taxable sales into a state. The legislation should also authorize a single use tax “collection” rate per state for remote sales with the revenues therefrom to be allocated proportionately among local governments. This authorization should offer states the option of employing a “blended” rate reflecting the weighted average of state and local rates across the state. “The legislation would provide that states joining the Compact would be required to work with appropriate parties to develop and adopt a simplified sales tax system, thereby removing all burdens on remote sellers. This proposal would allow states that have accomplished such a system to begin collecting use taxes on remote sales by January 1, 2004. For those states that do not chose to simplify their tax collection system, current law will apply.  Beyond 2004 states that had either chosen not to simplify, or failed to meet the required criteria, by December 31, 2003 can opt into the system, commencing with any succeeding calendar year, by meeting the simplification standards set forth. Under the Compact, an independent third party, such as the General Accounting Office (GAO), would need to verify for each state that they have met the standards set forth before they could commence to collect remote use tax. Congress and the National Governors Association should work together to select a mutually agreeable third party for this task of verification, and this independent verifier should be named in the legislation creating the Compact.  A level playing field and a ban of Internet access and discriminatory taxes is something that nearly all Commissioners agreed to. Yet it’s interesting to note that those entities directly affected by this issue, namely, the states, localities, retailers, retail real estate and consumers support our proposal. While government was represented, the Commission excluded these other vital voices.