Despite failure to achieve the required 2/3 majority consensus on any position on how to apply the sales tax to electronic commerce transactions, the ACEC did include in its report to Congress a proposal that received 11 positive votes (out of 19 votes). The report of the minority was not included in this report. The key elements of the sales tax proposal included in the ACEC�s report to Congress are described below.
The majority of ACEC members advocate that the ITFA moratorium be extended an additional five years. In addition, it should be broadened to also prohibit taxation of digitized goods and their non-digitized counterparts. Thus, for five years, no state or local governments would be allowed to collect sales tax on any sale of software, periodicals, books, videos, and any other items that can be digitized.
The majority proposed that the following factors would not cause a seller to have sufficient nexus for sales and use tax collection purposes: "(a) a seller�s use of an Internet service provider ("ISP") that has physical presence in a state; (b) the placement of a seller�s digital data on a server located in that particular state; (c) a seller�s use of telecommunications services provided by a telecommunications provider that has physical presence in that state; (d) a seller�s ownership of intangible property that is used or is present in that state; (e) the presence of a seller�s customers in a state; (f) a seller�s affiliation with another taxpayer that has physical presence in that state; (g) the performance of repair or warranty services with respect to property sold by a seller that does not otherwise have physical presence in that state; (h) a contractual relationship between a seller and another party located within that state that permits goods or products purchased through the seller�s web site or catalogue to be returned to the other party�s physical location within that state; and (I) the advertisement of a seller�s business location, telephone number, and web site address."
The majority encourages state and local governments to work with an existing organization involved in drafting uniform laws for the states to adopt (National Conference of Commissioners of Uniform State Laws (NCCUSL)) in order to create a uniform sales and use tax act. This uniform act should cover tax base definitions, sourcing rules, audit procedures, and administration. In addition, the majority recommended that a new advisory commission be formed to oversee the work towards a uniform sales and use tax act.
Five of the eight Commissioners representing government (Commissioners Jones, Leavitt, Lebrun, Kirk, and Locke) released a report on their own. This report explains the minority�s concerns with the majority report, lists several principles that should guide reform and lays out a proposal for state and local governments to address issues of applying the sales tax to e-commerce.
The minority�s concerns with the proposal of the majority is that it would create special "tax privileges" for e-commerce businesses leading to a $20 billion annual shift of taxes to main street businesses and individuals. They also suggest that the majority report is not "tax and technologically neutral" as required by the ITFA because it favors e-commerce businesses. The minority report also states that the majority proposal would undermine state sovereignty by limiting state and local taxing authority and limit the ability to provide local services.
Last Modified: Feb 22, 2023The principles laid out in the minority report include:
- There must be a "level-playing" field where all sellers are treated similarly regardless of their form of distribution.
- There must be "radical" simplification of the sales tax.
- The Internet should not be a "target" for new taxes.
- The demand for services of state and local governments will not decline in the future and any changes to the tax system must recognize this.
- There is no need for the federal government to restrict state and local taxing authority.
- Changes in the telecommunications industry necessitate updating existing taxes imposed on this industry.
- Tax policy must not compromise privacy rights on the Internet.
Minority RST proposal
The minority suggests a "streamlined and fair" tax system, which would include the following elements:
- The moratorium against Internet access taxes and multiple and discriminatory taxes would be extended until simplification efforts are completed.
- Give the states until the end of 2003 to radically simplify the RST. State and local governments should work with the National Conference of Commissioners on Uniform State Laws (NCCUSL) to create a "streamlined sales and use tax system." The features of such a system should include centralized registration, uniform definitions of the tax base, uniform sourcing rules, uniform exemption administration rules, protection of consumer privacy, certification method for software to be used for compliance, uniform returns, and uniform audit procedures. In addition, Congress should adopt legislation to provide that states adopting the streamlined sales tax system will be allowed to collect use tax from remote sellers, although a de minimis rule would exist.
- Congress should not legislatively define nexus (as suggested by the majority) because doing so focuses too much on physical activity which is not an important factor for e-commerce. Also, under the streamlined sales tax system, it would be simpler to determine tax collection obligations based on a seller�s sales volume in the state. In the meantime, states should try to clarify nexus guidelines and have a procedure to enable sellers to determine if they have nexus in the particular state.
- Telecommunications taxes should be simplified and modified to better address deregulation and other changes in the industry. Consideration should be given to phasing out the 3% federal telecommunications excise tax, if it makes sense given existing federal revenue needs.
- Citizens should be kept informed on various proposals and their likely impact to state and local revenues. In addition, revenue neutrality should be a goal.
- By the end of 2003, the states should develop a uniform and simple system to tax digital products and services that does not violate individual privacy rights or create a compliance burden.