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State, Local Groups Unveil E-Commerce Sales Tax Proposal.

"We all despise taxes, but if we have to have them, they must be fair."

With those words Utah Gov. Michael O. Leavitt (R), chairman of the National Governors' Association, released a proposal last week calling for radical simplification and streamlining of state and local sales tax systems, a three-year stand-still on federal legislative action that might affect the ability of states to require businesses outside their borders to collect sales taxes, and development and implementation of a new, voluntary "zero burden" pilot sales tax collection effort that uses trusted third parties, not vendors, to collect and remit sales and use taxes owed on remote purchases to state and local governments.

The full text of the proposal, "Streamlined Sales Tax System for the 21st Century," is available on NLC's homepage at:

The proposal was submitted to the 19-member Advisory Commission on Electronic Commerce, chaired by Virginia Gov. James Gilmore (R), in response to the commission's September call for proposals to address the feasibility of collecting sales taxes on electronic commerce. Two weeks ago Gilmore sent the commission he leads his own plan that would permanently eliminate the imposition of sales taxes on Internet transactions (see The Weekly, 11/15/99.) Gov. Leavitt also is a commission member.

The joint proposal was endorsed by other state and local government groups and by Michigan Gov. John Engler (R), who said, "In Michigan, we strongly oppose any new taxes on the Internet. This issue is not about new taxes and I applaud the National Governors' Association for setting the record straight. In fact, most of our nation's governors have solid reputations as avid tax cutters. We also believe in fairness and a level playing field for retail competitors. Government should not be in the business of picking favorites among competitive forces such as traditional retailers or emerging electronic retailers." Maryland Gov. Parris Glendening (D) also endorsed the initiative.

Also weighing in on the issue were a coalition of retail merchants associations, booksellers, and the International Council of Shopping Centers, who said in a letter to Gilmore, "Our nation's tax policies should promote equal treatment for all commercial transactions regardless of whether the sales are made in a store, from a catalog, or via the Internet."

Leavitt said that while taxfree E-commerce today was a small part of total U.S. retail sales, it would become an important factor and a major drain on state-local revenue systems in the future. More than 40 percent of state revenues come from sales taxes. The streamlined sales tax system proposal was timely, Leavitt said, because "Today, this problem is big enough to see and small enough to solve."

The proposal, crafted by state and local tax administrators in 33 states, has multiple goals. It seeks to streamline the nation's existing sales tax systems to make them adaptable to today's information economy. It proposes to nurture the expansion of the Internet by eliminating all bandwidth, byte, access, and multiple or discriminatory taxes on the Internet itself.

It seeks to discourage any action by the federal government on state and local sales taxes.

Finally, through the voluntary pilot program, it proposes to level the playing field so all sellers and buyers are treated equally, while not imposing a burden on sellers to collect state and local sales taxes.

The voluntary "zero burden" system would be created over the next two to five years. After that time, the proposal envisions that states and local governments would move to a unified system and embrace the same tax classification systems, definitions, and audit standards.

"The existing system of state and local sales taxes will not work in the 21st century," Leavitt told an audience of reporters at the National Press Club "Morning Newsmakers" event.

"It is unthinkably complex and incompatible with the direction of commerce in the world. It must be modernized because at this point we don't have a sales tax system that will accommodate a level playing field." The proposal urges states to move toward uniformity--in product codes, sourcing rules, procedures for the administration of exempt transactions, and definitions--and to limit the frequency of tax rate changes.

The three-year time-out, Leavitt said, is designed to discourage the federal government from acting on the issue until state and local governments have an opportunity to simplify existing sales tax systems and give the "zero burden" approach a fair test.

"A federal law would be an unconstitutional violation of state sovereignty," Leavitt said. "Thomas Jefferson would roll over in his grave if he heard that Congress was going to tell state and local leaders what they can and cannot tax in their own communities. And if the federal government decided to collect taxes on remote sales, we know how that would turn out--the IRS would be more than pleased to collect the money and Congress would be happy to appropriate it."

Under the proposal, a participating merchant would forward sales information to a "trusted third party"--most likely a credit card company, bank, or other firm with tax administration and computer expertise. The third party would calculate and collect the appropriate state or local tax and remit that tax back to the state where the buyer lives.

The third party would provide tax information at the time of the sale, so that information on taxes due could be furnished to the buyer prior to the completion of the transaction. The third party would be responsible for providing all transaction and return information to states, and local governments where appropriate, along with the tax remittance.

Third parties would be selected and certified by the states, and would get a cut of the sales tax revenue collected to reimburse them for their efforts.

"Basically, it's outsourcing an important part of sales tax collection," Leavitt said. "We are going to tell our tax commissioners: you're fired, we're hiring someone else."

What would motivate a remote seller to participate voluntarily in a pilot system to collect state and local sales taxes? Leavitt outlined two reasons related to the future direction of e-commerce and cost savings.

Leavitt said the proposal acknowledges some fundamental facts about our nation's increasingly information-based economy and the growth of e-commerce. "The successful retailer of the future will have physical stores, a catalog, and an Internet presence," he said.

Few of the first wave of dotcom e-tailers had a physical presence (nexus) in cities and towns, Leavitt said, but the time of the first wave has passed. The next generation of smart retailers will integrate web sites with in-store shopping. E-commerce will explode, the interests of e-tailers and bricks-and mortar retailers will converge, and more and more retailers will become clicks-and-mortar operations.

Most retailers will be willing to cannibalize a small portion of in-store sales for the great promise of sales growth on the Internet, Leavitt said, but only if there is a level playing field and equal treatment. "These major national retailers are making huge investments in web sites and e-commerce software," Leavitt said. "When they wake up and realize that they are at a competitive disadvantage because of nexus, I think we will see even more pressure for a level playing field."

The proposal's cost savings come from tax simplification by state and local governments, which Leavitt said could save businesses about $4 billion annually in administrative costs. The proposal would eliminate costs associated with sales tax compliance, tax returns, and audits, eliminate tax rate monitoring, end record-keeping for sellers, eliminate requirements for sellers to police the intent or status of purchasers, and eliminate bad debt and audit liability risks for sellers exercising reasonable care.

In response to questions from reporters, Leavitt acknowledged that the e-commerce tax debate has become highly politicized. "Some say this debate is about free trade, but what they really mean is protectionism: they want special privileges for a particular type of retailer. This debate is really about fair play."

"The politics of this are complicated and, frankly, not very pleasant," Leavitt said. "I'm surprised by the positions of some of my Republican colleagues, who would give away and then roll over the most fundamental rights of states to control their own destinies. Are we the party of devolution? Are we the party that advocates for government close to the people?"

The Advisory Commission on Electronic Commerce will consider all proposals at its next meeting in San Francisco on December 14-15, 1999. The commission will make a final report to Congress in April, 2000. The Internet Tax Freedom Act, passed by Congress last year, placed a moratorium on all new Internet taxes until 2001.

Long-standing NLC policy calls for enactment of federal legislation authorizing state and local governments to collect sales and use taxes on remote sales. The NLC membership will debate and vote on additional policy resolutions on electronic commerce at next week's Congress of Cities in Los Angeles.
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Author:Fletcher, Jeff
Publication:Nation's Cities Weekly
Geographic Code:1USA
Date:Nov 22, 1999
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