Michael O. Leavitt Center for Politics & Public Service

• • 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.