National Tax Association Communications And
Electronic Commerce Tax Project

Organizing Documents  (OD-6) PRELIMINARY DISCUSSION OUTLINE PREPARED BY THE STEERING COMMITTEE BUSINESS REPRESENTATIVES FOR THE LA JOLLA MEETING OF 2/4/98

I. Introduction

The Business Groups represented on the NTA Communications and Electronic Commerce Steering Committee ("Business Group Members") met on January 15 and developed a preliminary discussion agenda for the La Jolla meeting on February 4.

This preliminary agenda is an outline for future discussions on the taxation of electronic commerce. It is intended to address the issues on which policy guidance is required from the Steering Committee. Please note that this discussion outline does not constitute a proposal being advocated by any Business Group Member, or by the Business Members as a group.. The necessary consultation with our various constituencies has not yet occurred, so it is imperative that this discussion outline not be attributed to anyone as a proposal.

We have discussed among ourselves the importance to the business community of tax simplification, compensation, and equality of treatment, and concluded that they are collectively the main justifications for the Business Group Members' active involvement in the Project. Some, but by no means all, of the Business Group Members have reason to believe that their constituencies would endorse a plan that subjects them to a duty to collect tax in exchange for tax simplification, compensation, and equality of treatment.

We believe it is critical for the NTA Project to move aggressively in the direction of the tax simplification, compensation, and equality measures discussed below. We realize that this may require the input of government policymakers as well as tax administrators. Because many of these policymakers are not currently involved in the NTA Tax Project, we encourage the government representatives to consider how this level of policy dialog should be conducted.

In the spirit of seeking consensus, we offer the following discussion outline as a means of conducting a productive, policy-level discussion in La Jolla. We hope the outcome of that meeting will be the policy consensus we all seek to provide to the Drafting Committee.

II. Summary of Discussion Outline

In order for business to consider a duty to collect, the following measures must be simultaneously implemented:

(1) The policies described in this Outline apply to all vendors (i.e., not limited to electronic commerce vendors);

(2) Total Simplification of sales and use taxes is implemented;

(3) Vendors are provided a meaningful merchant's discount; and

(4) A de minimis threshold for sales and use tax reporting is established.

It is worth repeating that the Business Group Members have not agreed to adopt these principles, due to the substantial number of details that remain unresolved. And, due to time constraints, we have not yet been able to consult with our constituencies regarding these principles. The Discussion Outline represents no more than a skeletal framework for future discussions. It is our hope that the Steering Committee will focus its efforts on elaborating on "Total Simplification," a uniform merchant's discount, and an appropriate de minimis threshold. Following is a brief elaboration on the italicized components of the Discussion Outline:

III. All Vendors

The Business Group Members debated the appropriate scope of the Project. Some Business Group Members agreed that sales and use tax reform should be extended to all forms of commerce, and not be limited to only electronic commerce or remote selling; hence, local merchants will be treated in the same manner as traditional mail order and electronic merchants. The benefits derived by both business and government groups from a new and improved sales and use tax system should benefit all participants in commerce. Further, there was some agreement among the Business Group Members that broadening the scope of this Project will, in many ways, reduce the obstacles facing the Steering Committee. For instance, the importance of determining the definition of electronic commerce will be negated. Therefore, the Project's solution to improving the current sales and use tax system should be extended to all forms of commerce.

IV. Total Simplification

The Business Groups agreed that the Steering Committee must devote a substantial effort to simplifying the current sales and use tax system. The Business Group Members have termed the level of simplification necessary to reach agreement as "Total Simplification." The Simplification List submitted by the Business Group Members in December 1997, with some modifications, represents the Groups' definition of Total Simplification. For your convenience, the amended Simplification List follows:

DEFINITIONS

1. Absolute uniformity among the states regarding the definition of relevant terms and concepts. A "glossary" will be developed and operative language in all state and local statutory/regulatory sales and use tax promulgations would have to utilize the terms as defined in the glossary. Definitions should, at a minimum, include: "telecommunications," "tangible personal property," "intangible property," and "various services" (and classifications of same, such as "data processing").
    
2. Uniform categorizations of products and services, and an analysis of which states tax the enumerated categories, and how. States will jointly develop and provide this information in an electronic form suitable for use with sales and use tax software programs.

UNIFORMITY AND SIMPLIFICATION OF SALES TAX STRUCTURE

3. Absolute uniformity is the ideal outcome of the efforts of this Project. Uniform acceptance and application of any new system will likely require implementation of the system or rules by federal legislation.
    
4. A single sales and use tax rate will be set by each state.
    
5. Uniform, multistate registration forms and requirements will be developed (i.e., national registration form).
    
6. The effective date for tax rate changes (or other statutory changes) will be limited to January 1 and July 1, with a minimum six (6) month notice period of any tax changes.
    
7. A uniform bad debt deduction and other provisions (e.g., handling of bad checks, etc.) will be provided to vendors who do not collect amounts due in taxable transactions with respect to which tax has already been remitted.
    
8. Uniform direct pay permit rules and registration requirements will be provided.
    
9. Uniform refund claim forms and procedures will be provided.
    
10. Uniform exemption provisions will be developed, not only from state to state but also between sales tax and use tax. Each state may select whichever exemptions it deems appropriate from the glossary of exemptions. Note that there are three types of exemptions - exempt uses, exempt purchasers (including intercompany transactions), and exempt items.
     
11. Certain presumptions will arise, e.g., as to the correctness of information provided by a customer, and will be rebuttable only if bad faith on the part of a vendor is shown.
     
12. Uniform procedures for assessments and appeals. In addition, uniform audit procedures, e.g., sampling methods, will be implemented.

RETURNS AND FILING

13. A national uniform sales and use tax return will be developed.
     
14. Multistate taxpayers will have the ability to file electronically in every state; in addition, taxpayers will have the ability to remit tax electronically (EFT) through a uniform payment mechanism.
     
15. Sales and use tax returns will be required no more frequently than quarterly.
     
16. Vendors will be provided a 3% merchant's discount, with no maximum or cap.
     
17. One national filing and remittance point (electronic), or, alternatively, automatic electronic collection with no filing required, or a combination of both will be designated.

SITUSING/SOURCING RULES

18. Collect and remit tax based on customer's state.
     
19. Provide a safe harbor for vendor liability similar to the "good faith" shield that exists for accepting resale certificates.
     
20. Situsing rules for licenses and sales of property and sales of services will be uniform.
     
21. Approved non-punitive uniform mechanism for dealing with purchases from customers who decline to voluntarily provide information.

V. Merchant's Discount

As agents of the state, the Business Group Members contend that vendors reimbursement is appropriate considering the substantial costs associated with collection and remittance of sales and use taxes. As point number 16 indicates, the Business Group Members feel that three percent of tax collections represents a fair merchant's discount, pending further research into studies which have reportedly been performed at the behest of the retail industry.

VI. De Minimis Threshold

It is unfair and unrealistic to expect vendors to collect and remit a negligible level of tax to each and every state. Therefore, a vendor will be relieved of a filing obligation if its sales fall below some predetermined, uniform level.

VII. Conclusion

The Business Group Members are committed to discussing the above Outline at the La Jolla Steering Committee meeting. While the Outline does not represent the views of any particular Steering Committee member, the Business Group Members believe that this Outline has the potential to evolve into a practical and fair approach to reforming the current sales and use tax system, not only for electronic commerce, but for all forms of commerce. We look forward to a thoughtful and productive discussion on February 4th. If any member of the Steering Committee would like to share comments with the Business Group Members prior to the 4th, please feel free to contact Jeff Friedman, Kendall Houghton, or Ken Silverberg and we will be certain to share the comments with the Business Group Members.

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