National Tax Association Communications And
Electronic Commerce Tax Project

Organizing Documents  (OD-4) COMMENTS OF THE STEERING COMMITTEE ON REPORT NO. 1 OF THE DRAFTING COMMITTEE

MEMORANDUM

Presented below is a set of comments of the Government Members of the Steering Committee for the NTA Communications and Electronic Commerce Tax Project on the Report No. 1 of the Drafting Committee for the Project. These comments represent a consensus of all the Government members of the Steering Committee on some general directions they believe the Project should take at this juncture and on the general scope of the Project. Given that there is consensus on these items, we considered it desirable to communicate these comments as a single submission, rather than as comments from individual organizations or members. Individual members and organizations will be submitting additional comments on Report No. 1.

A. Suspension of the State Tax Information Clearinghouse from further consideration at this time. The Government members believe that at this time no further efforts should be made to define or examine the concept of a State Tax Information Clearinghouse. [Part V of Report No. 1.] Instead, we believe that efforts should be concentrated on defining a system in which tax is collected at the time of sale, as is outlined in the other alternatives and as is done for the large part today. While the clearinghouse approach reflects creative thinking and is a straightforward effort to address the issue, there are two primary concerns with it. First, it would create a more intrusive means of sales/use tax collection than collection at the time of sale. This is likely to breed customer dissatisfaction with the process and may result in reduced sales and less compliance with tax laws. In addition, the approach raises serious privacy concerns and would create (or further foster) a perception among customers that both sellers and government are compiling data bases of personal information that are susceptible to misuse.

B. Scope of Project and Model Legislation should be broadened to include all remote sales of goods and services. The scope of the discussion in Report No. 1 is limited to the taxation of "electronically transmitted information or services." It does not encompass the sale of tangible goods where the interaction between the buyer and seller takes place via electronic communications. Neither does it encompass sales of either goods or services where the interaction between the buyer and seller takes place by other "remote" means such as telephone, mail order and other forms of direct marketing.

We believe the scope of discussion should be broadened to include the tax administration and collection system for all forms of remote selling and for sales of tangible goods as well as electronically delivered information services. We believe this is the appropriate focus for the discussion for several reasons:

• Only through addressing all forms of remote selling (and all types of goods and services) can one achieve a tax administration system that is truly neutral and avoids distortions. Without comprehensive coverage, certain forms of goods will be favored over other forms, commerce through certain media will be favored over others, and certain types of sellers will be advantaged over others. The result is an inequitable tax system and a drastically weakened sales tax system. As just one example, it makes little sense to develop a tax system that equalizes the tax treatment of a piece of software sold through a store and the sale of the same software as a download from a Web site, yet allows the mail order purchase of the same software effectively tax-free.
• Only by broadening the focus of the discussion can one reasonably talk about development of a uniform/consistent tax system that contains sufficient simplifications to make the system administrable. A more narrow focus would leave a patchwork system of rules that is more complex than the current system -- as unimaginable as that may seem.
• Failure to address all relevant forms of commerce will expose sellers of all types to greater risk and uncertainty than they face at the present time. Unless the tax administration system and requirements for all types of remote sellers are addressed, the rules applicable to a particular seller will be subject to the product they are selling, the medium they are using, etc. Inconsistencies across those variables will expose the seller to audits, assessments and determinations by the different states depending on the activities in the state. In other words, it makes for more intrusive tax administration because it requires a determination of which tax administration system is the appropriate one given several variables.

C. "Billing address" regime (with some modifications) seems to be appropriate for sourcing sales. We believe that adoption of a "billing address" nexus regime along the lines outlined in sections IV or VI is appropriate. There are details (e.g., throwback, throw-around, etc.) which will be addressed separately by various groups. As a general matter, however, we believe a billing address approach to sourcing, with appropriate standards and safe harbors for vendors making good faith efforts to determine the same, comports with standards of sound tax administration and general guidance in various court opinions. As noted at the outset of the Nov. 12 meeting, a critical question is the degree to which it will be difficult to obtain or otherwise know the "billing address." The paper being prepared on the frequency of the "anonymous" transactions should be very helpful in determining the lengths to which any statute in this area needs to go. If the scope of the project be expanded to sales of tangible goods, it seems logical that the situs or sourcing rules for such transactions should be the delivery or "ship to" address, given that that is an address which can be determined.

D. Simplification of the sales tax system is important and should comport with common notions of federalism. The Government members of the Steering Committee understand and agree that any extension of the requirement to collect tax on goods and services delivered into a state (regardless of medium) must be accompanied by steps to make the current sales/use tax substantially more uniform and significantly simpler (referred to as ÎsimplificationÌ). We are committed to exploring every available avenue in this regard. One touchstone or criterion in our evaluation of simplification options, however, will be the degree to which they comport with the basic principles of federalism. We believe that state and local governments play an important role in the federal system. Determination by state and local elected officials of the tax base, the level of taxation and the remedies and protections is not only an important element of sovereignty, but is a matter of high importance to citizens to whom those officials are accountable. Simplification and uniformity are by no means incompatible with federalism; it simply requires that it be approached in certain ways. For example, state legislatures should retain to determine what goods or services shall remain exempt in their respective states, yet within a nationally uniform set of definitions of goods and services.

The Government members believe that the Project has already set in motion a process that can be effective in exploring the simplification issue. The simplification "wish list" supplied by the Business members, along with the simplification options identified in Report No. 1 and other ideas, provide ample material for discussion. We firmly believe there is an opportunity to achieve what all parties would consider to be significant simplification. We will be providing our initial thoughts in this area to the Business members by January 14.

We hope you find these comments constructive and helpful. We look forward to continuing the work in the Project.

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