Minutes 2/4/98

National Tax Association Communications And
Electronic Commerce Tax Project

Report on Operating Committee Meeting of 2/4/98

Minutes
NTA Communications and Electronic Commerce Tax Project
February 4, 1998 - La Jolla, California

Gary Cornia, Steering Committee Chair, called the meeting to order at 8:30 am. He welcomed the members and guests. He thanked all participants for their comments on Draft Report No. 1 and other exchanges of material between the Government and Business members of the Committee. He indicated that he thought considerable progress had been made and that the day's meeting would be a productive one.

Ken Silverberg presented the Business representatives position on the Project to date. He indicated that a majority, but by no means all, of the business members believed it was important to engage in a discussion regarding a possible expansion of the duty to collect use taxes on goods and services delivered into a state in exchange for substantial simplification and increased uniformity in state and local sales and use taxes. He indicated that such a system, in the minds of the business community, should extend to all forms of commerce -- electronic, remote and traditional, over-the-counter selling -- and that the requirement for uniformity among all states was paramount. He also questioned what was meant in various government writings about "consistent with traditional notions of federalism..." and questioned whether the appropriate types of government representatives were involved in the project.

Harley Duncan presented the Government members observations on the Project. He indicated they were encouraged by the progress to date and were enthusiastic about entering into a debate regarding an expanded duty to collect in exchange for a drastically simpler and more uniform sales tax. He indicated that government members viewed this trade-off as necessary to the long term viability of the sales tax. He indicated that the government members felt that increased uniformity and simplification was consistent with "traditional notions of federalism...." He indicated that the ability of state and local officials to establish their tax rates and tax bases was a necessary element of state sovereignty. However, it was possible to constrain those choices to selection of items to be included in a tax base to a list of uniformly defined items or services. Likewise, it was not entirely inconsistent to constrain the choice of rates in the interests of simplicity. He indicated that the Government members included 8 elected officials and 8 appointed administrators; it was felt to be balanced in his opinion.

Based on the comments to Draft Report No. 1 and the issues raised by the Committee members, the meeting was organized into a discussion of six topics. Each discussion was lead by a Member of the Project Operating Committee. The remainder of these Minutes are organized according to these topics.

Scope of the Tax Project:
Jeffrey Friedman of the Committee on State Taxation lead this discussion. Members of the Steering Committee recognized that the original scope of the Project was limited to the state and local tax consequences of communications and electronic commerce. It was also noted that the Steering Committee agreed to initially examine sales and use taxes.

The Steering Committee conducted a lively debate regarding the pros and cons of extending the Project's scope to include all commerce. Identified benefits of expansion include avoiding the thorny question of defining "electronic commerce," and the recognition that any agreeable result will likely have implications outside of electronic commerce. Some Steering Committee members noted that electronic commerce should not be granted an advantage or disadvantage compared to other means of conducting business. Therefore, a discussion of a proposed electronic commerce tax solution should, at least, include a consideration of the effects on other forms of commerce.

The main detriment of expanding the Project's scope is an increase in the number of tax issues that would require consideration and resolution. Some concern was expressed that the composition of the Steering Committee did not adequately reflect a broad enough cross section of commerce to adequately discuss these additional issues. A possible solution is to invite additional groups or persons to provide input on particular issues affecting "traditional" commerce.

The vast majority of those persons attending the meeting who expressed a preference agreed it was appropriate to expand the scope of the Project to include all commerce. The Task Force on Scope will need to address what new or additional issues will have to be addressed. Further, the Task Force will have to identify appropriate parties that should be consulted in discussing "all commerce."

Situs and Sourcing
The Committee then moved to a discussion of the issue of the manner in which sales in electronic commerce should be sourced or sitused for sales and use tax purposes. Paull Mines of the MTC presented the Government position; Andy Ottinger (USWest/USCA) presented the Business position. The following are the major points made during the discussion.

The model being analyzed is a "traditional" sales and use tax where transactions are sourced to and taxed in the state of destination or use. At this point, we are not considering departing from taxation in the state of destination at least to a substantial degree. It may be that taxation in the production state for some [smaller] sellers makes sense, but in the main, we are talking about taxation in the state of destination.
The "billing address" of the buyer is useable as a surrogate or proxy for actual knowledge of the destination state where that address is known or can be determined by the seller. Where, however, there is knowledge of the actual "ship to" address (i.e., in cases of sales of tangible goods), the "ship to" address would trump a billing address as the indicator of state of destination.
The business community believes that the requirement should be only to source a transaction to the "state" level. The difficulties and imprecision of sourcing below that level are more than can be expected.
Beyond the issue of the level to which a transaction can be sourced, there are the following major issues to be resolved:

How to deal with transactions in which the billing address is not known or made known to the seller during the transaction.

How to deal with transactions that are truly "anonymous" or where the billing address of the buyer cannot be determined.

How, if at all, to deal with sales to jurisdictions in which no tax is applied (i.e., tax havens) [or at least the customer has indicated that is the appropriate state for sourcing.]

The Business community believes these issues can be minimized if the level of sourcing is limited to the state level. They believe it is possible for a seller to determine the state of destination during the transaction. It is unrealistic to expect that reliable, more complete address information can be obtained.
Credit card transactions present a special case in that the billing address is not known to the seller at the time of the transaction, and in some jurisdictions at least, a seller may not inquire as to the same at the time of the transaction. The Business community believes that it may be able to inquire and/or otherwise obtain the state of destination on such transaction. Financial institutions do have access to such information. To provide it to sellers would require "significant systems retooling" for which they would need to be compensated.
Steps need to be taken to minimize the exposure of sellers to liability for using inaccurate information provided by buyers when they have acted in good faith to determine the same.
There will be certain businesses in which all transactions are "anonymous." A system for dealing with such should not be punitive to the seller.
The concept of a "universal direct pay permit" for all business transactions should be considered (perhaps for just non-tangible items without an identifiable "ship to" address). This minimizes the sourcing issues (or at least shifts the responsibility from the seller). It is also helpful in appropriately situsing purchases by multijurisdictional firms where information may be delivered to a single source for later distribution or use by multiple locations in multiple taxing jurisdictions. It may also minimize improper sourcing to a tax haven jurisdiction.
As to tax havens, it is acknowledged that there are legitimate sales into jurisdictions without a tax, but at the same time there is a potential for "abuse" of such billing addresses. The concept of throwing back all sales sourced to nontaxable states is not supported. There is some question (depending on other features of the system) as to whether special treatment of sales to nontaxable jurisdictions is necessary.

Tax Rate
Wade Anderson chaired the discussion of the appropriate tax rate structure in a simplified/uniform sales tax system. Jim Schroeder, Thompson Publications, presented the industry viewpoint. He stressed that the Business members felt strongly that the tax rate structure in such a system should include only one statewide tax rate applied to all taxable sales. That rate should be established by the state legislature and include a component for local taxes as determined by the legislature. The legislature would also provide a formula or other method for distributing funds to local governments. Jim indicated that to try to comply fully with the myriad local tax rates was simply not possible, regardless of the software used, and that liability for failing to comply fully fell back on the seller. In addition, the unavailability of information on electronic commerce sales dictated the use of a statewide rate.

Frank Shafroth presented the viewpoint of state and local governments. He indicated that the government groups had at times agreed to the concept of a single statewide rate with an "in lieu" component for local taxes in the context of the "Bumpers Bill" in the Congress. He indicated such an agreement constituted a compromise of sovereignty and created a number of difficult issues for financing necessary services, retirement of state and local indebtedness and other areas of government policy. He noted that the government members felt it was appropriate to evaluate the ability of technology to "solve" the tax rate problem and to comply with local option rates as they exist today. He also indicated that other approaches such as "safe harbors" for using "certified software" or collection on the basis of Zip Codes might be acceptable alternatives.

Tax Base
Kendall Houghton introduced the Tax Base topic for discussion by noting that the Business and Government writings on this topic acknowledged a tension between Business' desire for more uniformity and simplification, and Government's desire to maintain the highest possible degree of state/local governmental sovereignty in setting forth tax policy. She suggested several areas of inquiry might flow from the discussions, including: (1) whether uniform definitions, and uniform exemption provisions, should be drafted; (2) whether the introduction of uniform definitions would likely result in a contraction or expansion of existing state tax bases; and (3) whether the group's work on Tax Base issues would need to encompass consideration of the taxability of goods, versus services, versus digital products, versus intangible property, as those terms are currently used.

Kaye Caldwell (representative of CommerceNet) then presented a Business perspective of Tax Base issues. The business community feels strongly that state jurisdictions should have the sovereignty to determine which particular products and services should, and equally importantly, should not, be included in their tax bases. However, she noted, this sovereignty should be limited to state-level decisions, and local jurisdictions should follow the lead of the states. Business wants to see uniform definitions of terms; and, either in addition or as an alternative, Ms. Caldwell suggested that we consider the advisability of requiring that any jurisdiction desiring to tax an item not already included in a uniform master list be required to add the item to that list.

Dan Bucks (representative of the MTC) responded with the Government perspective. He agreed that the use of uniform definitions for tax base items was desirable to the Government group, as well. He suggested that a "third party" such as the United States Customs Service be consulted in the process of formulating such definitions, so that a neutral and already-accepted definition be used where possible.

Comments/questions on Tax Base issues included the following:

Should it make a difference whether the Government approach toward defining Tax Base keys off of affirmatively choosing what taxable items to include, or rather of carving out exemptions from the full catalog of potentially taxable items?

The process of defining taxable items and exemptions is itself politically charged, since the narrowness or breadth of a definition may change the interpretations of taxability thereunder.

On the other hand, if the only discretion in this process correlates to the inclusion/exclusion of a defined item, then perhaps the actual definition process is less important.

An extremely important issue to the Business group is the requirement that all Governments uniformly participate in the Tax Base determination process being discussed; it would defeat the goal of achieving uniformity and simplicity if individual tax jurisdictions were permitted to "elect out" of this consistent definitions regime.

A comment was made by a government speaker that, if simplification is to work, the tax base must be uniform within the state. To that statement was added the caveat, "for those states that participate." This caveat engendered a great deal of discussion that focused, from the business perspective, on the absolute need for participation by all the states. An ability to opt out, by even one state, destroys the concept of simplification in the view of business.

A discussion regarding the ability of federal legislation to trump state constitutional concerns was held. Although not conclusive, most participants in the discussion believed that federal legislation, if properly structured, could have the effect of allowing states and local jurisdictions to adopt necessary implementing legislation regardless of the existing constraints found in state statutes or state constitutions.

Simplified Filing Alternatives
Ken Silverberg introduced this issues as dealing with the registration, return and remittance filing requirements involved with the sales and use tax. It does not include the "collection or vendor" allowance issue.

Ellen Fishbein presented the position of the business members. She stated that the business community members had a fairly simple goal of minimizing or eliminating the paperwork burden required in complying with the sales tax, even under a simplified system. She indicated that there was a desire for uniform forms among the states, an ability to file electronically in all states, and an interest in exploring the use of a "clearinghouse" or central point of filing which would then be responsible for distributing returns and remittances among the states.

Harley Duncan responded for the government members and indicated that he felt there was substantial agreement on both sides. He noted that government members were willing to pursue one or more of the following alternatives: (1) uniform forms; (2) increased electronic filing where the state had an electronic filing program; (3) a "single point" or "clearinghouse" approach for returns and remittances; and (4) a base state approach to filing where a seller would file a single return and remittance with its "base" or headquarters state (with appropriate schedules to allow apportionment among other states), and the base state would be responsible for providing the information and funds to other states.

There was a general discussion of the base state concept with considerable interest in exploring the topic further.

"Other" Administrative Simplifications.
Val Oveson, the discussion moderator, introduced the issues to be discussed in this section of the agenda. The issues were:

Uniform vendor discount
Uniform bad debt deduction
Uniform direct pay permit rules and registration requirements
Uniform refund claim form and procedures
Uniform exemption provision and certificate
Uniform presumptions of correctness of information
Uniform procedures for the assessments and appeals
Uniform audit procedures and sampling methods
A uniform de minimis threshold

Val commented that there may be some overlap among the issues listed above and the issues presented in the other sessions. These overlaps should not be serious and will be reconciled as we proceed.

Dan Bucks, from the Multistate Tax Commission, presented an overview of the governments position on these issues. Dan went through most of the issues mentioned above and presented pros and cons of adopting them from the government point of view, but strongly concluded that all issues mentioned need to be looked at and seriously considered by the governmental united involved in the Project. He did point out that there will be state constitutional questions arise when dealing with issues like the uniform appeals provisions and procedures. The comment was made that this will be the case with many of the issues that we are dealing with and that the question will need to be dealt with by the legal scholars.

Andy Ottinger, from U.S. West Communications, presented the industry overview of the issues. He emphasized the importance of the package of simplifications. Andy commented that the industry representatives are anxious and willing to dive into the issues and work them through to workable solutions. He did not go through an item by item analysis of the issues because of lack of time, but stressed the importance the business representatives placed on a meaningful vendor allowance as an important element of any system.

Because this session was at the end of the day and the time allotted for the discussion of the Steering Committee members had expired, Val attempted end the discussion and defer the issues to a future date. Val made the comment that there appeared to be agreement on the general premise that these issues were important and needed to be considered further. The suggestion that there was agreement was met with some stiff opposition from some Steering Committee members. Their concern centered around the underlying premise of the project. Val ended the discussion at that point and turned the time back to Gary Cornia, the Project Chair.

Formation of Subcommittees
The time for adjournment drawing near, Gary Cornia indicated that some of the Operating Committee members had met over lunch to discuss the next steps. Kendall Houghton chaired this portion of the meeting in Gary's absence. She noted that the Operating Committee was recommending to the Committee that a Subcommittee be formed around each of the major topics or discussion areas identified above. The Subcommittees are to be chaired by the members of the Operating Committee who lead the discussion at this meeting, and Steering Committee members should volunteer for the Subcommittee(s) on which they wish to serve.

Subcommittee chairs will be responsible for summarizing today's discussion and organizing the activities of the Subcommittee. It is expected that each Subcommittee will prepare a briefing and analysis paper for the Steering Committee's next meeting. The paper will identify the relevant issues in each area, discuss areas of agreement and identify alternatives for areas on which there is not consensus.

[Ed. Note: A listing of Subcommittee members is available elsewhere on the Project Website.]

Next Meeting
The Committee discussed the date and place of the next meeting. It was determined to meet in Salt Lake City, Utah on Thursday and Friday, April 23-24, 1998.

The meeting adjourned at 4:30 pm