National Tax Association Communications And
Electronic Commerce Tax Project

Organizing Documents  (OD-8) SUBCOMMITTEE ON SCOPE OF THE PROJECT

MEMORANDUM

The purpose of this memorandum is to outline the options identified by the Scope Task Force. The Task Force met several times via teleconference and discussed the pros and cons of several options regarding the proper definition of the scope for the Tax Project. Below are four options that the members of the Task Force identified:

Option 1. The scope of the Project should be limited to electronic commerce defined as the order and delivery of products and services in digital form via the Internet.

Option 2. The scope of the Project should be limited to electronic commerce defined as the order of products and services via the Internet with delivery effectuated by digital or any other means.

Option 3. Electronic commerce, as defined in Option 2, is part of a broader system of remote commerce. Therefore, the scope of the Project should be expanded to include taxation as it relates to the order and delivery of products or services from all remote sellers.

Option 4. The scope of the Project should include all commerce.

Unfortunately, the members of the Task Force could not reach agreement as to the appropriate scope for the Project. Apparently other groups discussed the appropriate scope for the project and reportedly reached a consensus. Such discussion should be shared with the Steering Committee during the discussion of scope. The Scope Task Force discussed the various options mentioned above with the intention of distilling the pros and cons of each in order to facilitate a discussion at the next Steering Committee meeting. Further, it should be noted that the Task Force participants felt that the scope of the Project should not be determined by reference to whether a seller had nexus with the taxing jurisdiction.

The benefits of each of the options are discussed more fully below. It is important to note that several participants assisted in the preparation of this memo. As a result, portions of the following discussion may reflect either a "government" or "business" bias. These biases should not be construed as reflecting the opinions of all of the participants of the Task Force.

Option 1. The scope of the Project should be limited to electronic commerce defined as the order and delivery of products and services in digital form via the Internet.

Option 1 is most consistent with the original "purpose statement" of the NTA project. Further, the majority of private industry participants in this NTA project are companies and trade associations which are intimately involved with the Internet as a medium of commerce, but which are not necessarily concerned with the varied and complex issues regarding the interstate delivery and taxation of tangible personal property. Consequently, a limited scope for this project is most consistent with the interests and expertise of the current project participants. If the project were to be expanded to cover the tax treatment of tangible personal property which is delivered in interstate commerce by conventional interstate common carriers, the Project should give public notice of the expanded purpose and invite a much wider group of participants.

As a new and still relatively modest-sized medium of commerce, the Internet lends itself to creative and collaborative efforts among tax administrators and private industry representatives to develop a fair and efficient tax system which minimizes the burdens on both the providers of Internet-delivered services and their consumers. The potential for progress and innovation towards achieving a logical and uniform system of taxation for electronic commerce will be grossly complicated, and most probably overshadowed, by the entrenched arguments which have separated direct marketers and tax administrators over the years in successive rounds of negotiations.

Imposition of sales and use taxes on the interstate delivery of tangible personal property involves a host of issues which generally are not present in a limited discussion regarding the taxation of digitally delivered products. For example, taxation of shipping and handling charges, treatment of returned goods, treatment of third-party done transactions (gifts), treatment of installment sales and continuity programs, definitional disparities regarding a wide range of commonly (but not universally) exempted products are issues which need to be addressed when dealing with mail order use tax issues. It would be a mistake for the Project to burden its efforts to bring clarity to the taxation of electronic commerce by introducing these additional issues.

A successful model for the taxation of digitally delivered products over the Internet could eventually have broader relevance to Internet transactions where the delivery of tangible personal property is by conventional interstate common carriers. The extent of such relevance, and the determination of how the electronic commerce model would need to be modified to accommodate expanded spheres of commerce, may be appropriate for consideration after the more limited e-commerce project is completed and its results evaluated.

To broaden the scope of the Project at this juncture is likely to draw into the process a number of participants who are skeptical or wary of the goals of the Project. A modest set of objectives for participants who are keenly interested in "pure Internet" issues is likely to result in a more focused discussion, and, ultimately, greater progress.

Option 2. The scope of the Project should be limited to electronic commerce defined as the order of products and services via the Internet with delivery effectuated by any means.

The advantages of Option 2 are best understood in the context of other alternatives considered. One such alternative was to expand the scope of the Project now to include all commerce. Factors which support this idea include: (1) the notion that e-commerce should not be favored or disadvantaged; and (2) the interest in e-commerce has created an opportunity for broad-based reform of the existing sales and use tax system. However, this alternative raises significant organizational issues, and is considerably beyond the existing mission statement of the Project. Serious consideration of this proposal would occasion additional debates over the size and composition of the Steering Committee, and the extent to which prior activities of the Project must be revisited in light of this expansion of the scope. Regardless of how the Steering Committee might decide these issues, the need to consider them would likely present a significant distraction and delay meaningful progress on substantive matters.

The principal advantages of Option 2 are pragmatic. First, it enables the Project to move forward, without the need for additional debate over organizational issues. In particular, Option 2 seems to fall within the existing statement of project purpose. Option 1, on the other hand, is more limited in that it focuses only on digitized products, and Option 3 is broader in that it would bring into the inquiry all remote sales transactions, including those that do not occur over the Internet.

Second, Option 2 preserves an inducement to the participation of state and local governments. Digitized products and services are largely untaxed at present, while use taxes that are currently imposed go uncollected from consumers. Whether or not one agrees that the seller should be involved in use tax collection, it is questionable whether the tax revenues associated only with the sale of digitized products and services are sufficient to keep the states at the table and willing to make concessions.

Two additional observations are warranted. First, the selection of Option 2 should not mean that the Project will undertake its remaining work in a vacuum. We should not put blinders on and design a system without regard for the way the rest of commerce is treated. Therefore, we may well continue to have disagreements over whether we are being faithful to the limits on scope. Hopefully these disagreements can be minimized if we maintain a focus on practicality, and also remember that solving the e-commerce issues in Option 2 need not be the end of the exercise. Some of us are hopeful that the whole system can be improved.

Second, selection of Option 2 does not mean that sales of digitized products and services over the Internet on the one hand, and sales of tangible personal property over the Internet on the other hand, must be treated identically. Some important differences between them have been identified, and selection of this scope option does not trivialize those differences. We are not in this Task Force devising solutions to the substantive problems or deciding how to account for real distinctions between businesses; we are merely addressing the scope of the Project.

None of the options is perfect, but Option 2 seems the best compromise that will allow continued progress.

Option 3. Electronic commerce, as defined in Option 2, is part of a broader system of remote commerce. Therefore, the scope of the Project should be expanded to include taxation as it relates to the order and delivery of products or services from all remote sellers.

The Organizing Documents for the NTA Communications and Electronic Commerce Tax Project state that the "purpose of the project is to develop a broadly available public report which identifies and explores the issues involved in applying state and local taxes and fees to electronic commerce." Since much of the scope subcommittee discussion was really a debate about what "electronic commerce" means, it is helpful to see how the term is generally used. The U.S. Department of the Treasury in its white paper on global electronic commerce says "electronic commerce is the ability to perform transactions involving the exchange of goods or services between two or more parties using electronic tools and techniques." According to an article by Arthur Anderson on the taxation of electronic commerce, "electronic commerce" is generally defined as transactions that involve the exchange of goods and services by electronic means." In numerous other articles, usage indicates that sales of goods are included in electronic commerce, not just digitally delivered services. Thus, a literal reading of the Organizing Documents supports Option 2, which proposes that electronic commerce be defined as the order of products and services via the Internet with delivery effectuated by digital or any other means.

The reason that the Project's scope should be expanded to include all remote vendors is that recommendations which are limited to electronic commerce will, in fact, discriminate against electronic commerce. Such recommendations will appear ludicrous if they are silent regarding more traditional forms of remote sales. For example, if a new nexus regime is created for electronic commerce while leaving the bright-line, physical presence rule of Quill in effect for more traditional forms of remote sales, it will create a tax incentive for purchasers to favor more traditional forms of remote sales over electronic commerce. This is clearly untenable. Recommendations which leave the status quo in effect for mail-order sales while proposing a rational taxing scheme for electronic commerce are sure to be soundly and vigorously rejected. Therefore, Option 3 is most appropriate and only expands the scope to the degree that it must be expanded for our recommendations to make sense. We will inevitably have to include remote sellers using other communications channels in order for the recommendations to be taken seriously.

While it is inviting to contemplate radical surgery to sales and use taxes as applied to all forms of commerce, the political and legal impediments to implementing any such recommendation are insurmountable. What is achievable, however, is a model which identifies remote sellers as a separate and distinct class. With enabling federal legislation, many of the suggestions made by Steering Committee members become feasible, including a single sales and use tax rate per state, uniformity regarding forms and filing, perhaps even a single national filing and remittance point. Federal legislation could also address the ongoing nexus debate surrounding electronic commerce by establishing the unique and sole means for states (and local governments through revenue sharing) to tax remote transactions.

State and local governments may be willing to entertain such a radical curtailment in their ability to control their own tax structures because of the recognition that electronic commerce could well rival traditional forms of commerce in the future, and given the importance of transaction taxes to state and local governments, continuation of the current regime for remote sales would be ruinous. It also signifies that business' objections to the current system of sales and use taxes have been noted and acknowledged. Unless we are prepared to say that electronic commerce should be subject to tax to the same extent that mail-order sales are today, we should focus our efforts on all remote sales.

Remote sellers can justifiably be treated as a separate class with more favorable tax treatment precisely because the sales are remote. Customers and vendors are not using government services to the same degree as is used in conventional commerce. This should suffice as a rational basis for remote sellers receiving more favorable treatment than conventional forms of commerce. By expanding the scope to include all remote sellers, we can arrive at a rational suggestion for restructuring the sales and use tax and fulfill our purpose of making recommendations for how electronic commerce might be taxed.

Note: The Task Force was unable to arrive at an agreed upon definition of "remote sellers." As a result, this definition, if needed, will have to be determined by the Steering Committee.

Option 4. The scope of the Project should include all commerce.

It has been noted above that expanding the scope to include all commerce may well prove overwhelming. However, there is one significant benefit of selecting "all commerce" as the appropriate scope: all taxable transactions will be treated similarly without regard to the method used to effectuate the transaction. Therefore, only one sales tax system will be in place. By expanding the scope to include all commerce, concerns regarding multiple sales tax systems will be obviated.

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